Research On Comovement In Security Returns: A Theory Review And Empirical Evidence From China Market

Comovement is a typical phenomenon in securities markets. It refers to patterns of positive correlations of returns among different traded securities. This paper expatiate the "fundamentals" and "behavioral" theories of such comovement and distinguish three common sources of such comovement : "fundamentals-based" comovement , "category-based" comovement and "habitat-based comovement" while the latter two belong to "behavior-induced" comovement.Based on these theories, we investigate and explain some comovement cases in China securities market. The first one is the sample stock adjustment effect of Shanghai 180 Stock Index. Using data on stock inclusions into and deletions from the index, we empirically assess the changes of comovement patterns between the adjusted sample stocks and the index after the index changes, and find prominent fundamentals-based comovement change and apparent behavior-induced comovement change while the latter does not appear in some fixed pattern. Our second case is the comovement in the discounts of closed-end funds. We find strong positive correlations among the discounts of closed-end funds in China market, and ascribe such comovement to behavior-based factors, mainly habitat-based. We further investigate the correlations between the discount of closed-end funds and the returns of different-sized portfolios, and find in China market the discount of closed-end funds comoves with the return of large companies. We believe that the empirical results of the above two cases are both highly related to the unique market environment and the structure and behavior features of our investors in China market. Finally, we probe into the distinct "block effects" in China securities market. We explain the features and formation process of the "block effects" in our market using the "fundamentals" and "behavioral" comovement theories and then discuss "block-based" investment strategy and its effectiveness.This paper gives a systematic and thorough analysis on the comovement among different securities, from theory to empirical research. The author hopes the results of this paper can be of some help in the related research field.