The Ungeheuer and Weber (2021) Comove and Stock Returns Effect Disappears with Control for Idiosyncratic Volatility

ComoveComoveComoveComoveComovettUngeheuer and Weber (2021, UW) propose a measure, the fraction of weekly stock returns that are in the same direction as the market, and document that positively predicts cross-sectional stock returns. We show that is strongly negatively correlated with idiosyncratic volatility. Controlling for the idiosyncratic volatility effect renders the effect insignificant, but not vice versa. For example, after controlling for the idiosyncratic volatility effect, the long-short portfolio’s monthly alpha falls to 0.115% ( = 1.55) in the US and 0.014% ( = 0.29) in 23 international markets.