By |Published On: June 24th, 2013|Categories: Research Insights|

Online Search and Return Comovement

  • Alvin Chung Man Leunga, Ashish Agarwala, Prabhudev Konanaa and Alok Kumar
  • A version of the paper can be found here.
  • Want a summary of academic papers with alpha? Check out our free Academic Alpha Database!

Abstract:

This study examines return comovement within attention-induced dynamic stock categories or habitats. Using online search behavior of individuals who visit the Yahoo! Finance web site, we investigate whether (i) investors focus their attention on small subsets of stocks (i.e., habitats), that change over time and (ii) changing investor attention affects the returns of stocks within attention-based dynamic habitats. We find that stocks that are frequently viewed on the Yahoo! Finance web site form clusters and the returns of stocks within these search clusters comove together. Further, as investor attention shifts, both the cluster composition and comovement patterns change. These comovement patterns do not reflect the effects of correlated cash flows or firm-specific news. Collectively, our results provide new evidence consistent with the predictions of the habitat-based model of return comovement.

Data Sources:

Yahoo finance, CRSP, Compustat

Alpha Highlight:

Search clustered stocks correlate with their cluster group more than with the market.

correl

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Strategy Summary:

  1. Paper uses data from Yahoo! Finance website to identify stocks that cluster together.
    • When choosing a ticker on this website, you get a list of other stocks people viewed that are similar to the stock you selected.
    • This list is used to create clusters in the paper.
      • See the paper and the appendix for the exact definition of a cluster.
    • Data is during 2011 and 2012, and is for Russell 3000 stocks (98% of overall market capitalization).
  2.  

  3. Paper finds that stocks that are clustered together exhibit comovement.
    • This result cannot be explained away by news stories or other common factors such as firm size, value, industry, or supply-chain.
    • When a stock leaves a cluster, it no longer comoves with the previous cluster.  If it joins a new cluster it now comoves with the new cluster.

Commentary:

  • Interesting paper which documents that stocks that internet users search comove together.
    • Would normally think that retail investors are using Yahoo! Finance to search for stocks, but since these stocks comove together, maybe this is used by more sofisticated investors as well.

About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

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For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

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