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The Value of Active Investing: Can Active Institutional Investors Remove Excess Comovement of Stock Returns?

Published online by Cambridge University Press:  30 January 2012

Pengfei Ye*
Affiliation:
Lally School of Management and Technology, Rensselaer Polytechnic Institute, 110 8th St., Troy, NY 12180. yep@rpi.edu

Abstract

This study uses Cremers and Petajisto’s (2009) method to separate active institutional investors from passive ones and shows that active investors can alleviate the anomalous comovement of stock returns. Focusing on 2 events linked to the excess comovement anomaly, Standard & Poor’s 500 Index additions and stock splits, I find that if an event stock has more active institutional investors trading in the post-event period, the anomalous comovement effect disappears. In contrast, if an event stock experiences a massive exit of active investors, this anomaly persists. The exit of active institutional investors also results in a strong price synchronicity effect.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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