Price-based Return Co-movement.

Green, T.C. and Hwang, B.H., 2009. Price-based return co-movement. Journal of Financial Economics, 93(1), pp.37-50.

Research Question and General Results:

The paper documents a source of return co-movement related to stock price. Specifically, stocks correlate with their counterparts in the same price category. Using the stock-split setting and extending the result to all stocks, authors find that stocks experiencing splits positively co-move with low-priced stocks and negatively co-move with high-priced stocks. Since the price-based co-movement is not germane to various firm characteristics, authors conclude that investors categorize securities based on their prices.

Empirical Results:

Stock-split serves a relatively clean circumstance for evaluating the price-based co-movement. It decreases a stock’s nominal prices without altering its firm fundamentals. In this paper, authors concentrate on 2-for-1 stock splits and construct corresponding low and high price indices. In the stock-split setting (a decrease in a stock’s nominal price), beta coefficients on low-priced index and high-price index are significantly positive and negative, respectively. This result suggests that a decrease in a stock’s nominal price by its split makes it become more correlated with its low-priced stocks and less with high-priced stocks. Besides, authors find a similar result for all stocks that stocks have an increased co-movement with their counterparts in the same price category. The result is robust to common variations in industry, firm size, transaction cost, and return momentum.

Determinants of Price-based Return Co-movement:

The empirical results demonstrate investors categorize stocks given their prices. Thus, authors conjecture that investors adopt price a naïve proxy for firm size and expect more upside potentials in low-priced stocks. The empirical test also confirms behavioral explanations. The weak relation between institutional ownership and price-based co-movement indicate that the co-movement is hardly driven by market frictions.