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April 28, 2021
When a shock hits the market, it’s no surprise that the values of multiple stocks drop simultaneously. For instance, one would expect COVID-19 lockdowns to cause both restaurant and gym company stocks to fall a phenomenon called comovement. Similarly, stocks tend to rise together during market upswings.
But what has vexed economists is so-called “excess” comovement. This often occurs during financial crises, when the values of many stocks fall in tandem more than one would expect based on fundamental factors, such as bad news about their industries. In a financial crisis, margin traders can be forced to sell, causing stocks to drop further. “It just spirals,” says Prof. Heather Tookes. “The margin trading system can be an amplification mechanism.”
Hi everyone. Quick heads up that later in this episode we ask our guest John Rogers a question about the stock of Viacom Corporation. Subsequent to recording the episode, Viacom’s stock got pulled down in connection with the implosion of the Archegos hedge fund. That explains why Viacom’s sharp recent pullback isn’t mentioned it hadn’t happened at the time we interviewed John. Hope you enjoy the episode.
Christine Benz: Hi, and welcome to The Long View. I m Christine Benz, director of personal finance for Morningstar.
Jeff Ptak: And I m Jeff Ptak, chief ratings officer for Morningstar Research Services.