Style-Related Comovement: Fundamentals or Labels?

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 so doing, 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. Back-dated constituent data from Barra reveal no such label-related shifts in comovement during the ten years prior to the actual introduction of the indices in 1992.

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