Comovement's Rise and the Information Diffusion View

During the period October 1992 to December 2011, monthly average market model R2 for US stocks grew at an average 0.53 percent per month. This stands in stark contrast to the decreasing correlations documented in Campbell, Lettau, Malkiel and Xu (2001) for the period January 1962 to December 1997. Results from our tests suggest that the increase in average R2 is consistent with the "information diffusion view" of Barberis, Shleifer, and Wurgler (2005). According to this view, comovement arises from more synchronized information arrival and trade executions across market participants. Faster and broader information diffusion might have resulted from technical and regulatory change in financial markets since the 1990s. Additional tests rule out the possibility that this shift could have been caused by changes in the composition of publicly traded stocks, comovement spikes around market crashes, or more intense style investing.