Style-Related Comovement: Fundamentals or Labels?



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    • Brian H. Boyer is with Brigham Young University. I thank Barra for providing data on index constituents. Barra Inc. is an investment software and research company, and the data have been provided as part of a broad academic program to foster the study of investment technology. The author thanks John Ammer, Brandon Bates, Joseph Chen, Michael Gibson, Lars Lefgren, Grant McQueen, Todd Mitton, Matt Pritsker, Brian Reid, Tyler Shumway, Clemens Sialm, Wilbert Van Der Klaauw, Keith Vorkink, Jonathan Wright, Kathy Yuan, Lu Zheng, and seminar participants at Brigham Young University and the University of Michigan Business School for helpful comments. The author particularly thanks Rob Stambaugh (the editor) and an anonymous referee for providing many helpful suggestions. This paper previously circulated under the title “Comovement among Stocks with Similar Book-to-Market Ratios.


I find that economically meaningless index labels cause stock returns to covary in excess of fundamentals. S&P/Barra follow a simple mechanical procedure to define their Value and Growth indices. In doing so, they reclassify some stocks from Value to Growth even after their book-to-market ratios have risen, and vice versa. Such stocks begin to covary more with the index they join and less with the index they leave. Backdated constituent data from Barra reveal no such label-related shifts in comovement during the 10 years prior to the actual introduction of the indices in 1992.