Business Intelligence

The Pack Mentality: A Behavioral Finance View Of Stock Price Comovement

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Executive Summary

By looking carefully at data on individual stock prices, it is easy to find many examples of "Comovement"-groups of stocks whose prices tend to move together. For instance, prices of stocks in the same industry tend to move together, as do the prices of small-cap stocks, value stocks, and closed-end funds. The traditional way of understanding comovement in stock prices is the so-called "Fundamentals-based" approach. This approach says that stock prices move together because the intrinsic values of the underlying firms move together. Intrinsic value represents the true value of a firm, and is usually measured by taking the firm's future earnings and discounting them at a rate appropriate for their risk.

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