[gov3009-l] Internet Stocks and Market Classification

Shrewd, Crude, or Simply Deluded? Market Classification and the Internet Stock Phenomenon. Ezra Zuckerman (MIT, Sloan School of Management) Wednesday November 6 at noon Center for Basic Research in the Social Sciences 34 Kirkland Street, Room 22 Lunch will be served. Abstract: We analyze comovement among Internet and other categories of stocks during the late 1990s and 2000 in an effort to assess the sophistication of stock-market valuation. Prominent accounts of the Internet stock phenomenon suggest that the prices of these stocks were determined by simplistic thinking. In particular, investors were not discriminating as they crudely grouped all Internet stocks into an undifferentiated and highly attractive investment category. We find that, in fact, comovement among Internet stocks was high throughout much of this period but did not reach the very high levels assumed by prevailing accounts. In addition, we describe two additional patterns that are problematic for such interpretations. First, comovement is less characteristic of price increases than of price drops. Second, Internet stocks exhibited moderate to high period-to-period consistency in the manner by which category members were distinguished by investors. Together, our evidence supports our view that, rather than being anomalous, the Internet stock phenomenon was symptomatic of the general way by which equity prices are determined: valuation is driven by prevailing theories of value, which are reasonable but quite fallible. This view has important implications for how scholars and managers understand and react to stock market dynamics. The paper will be posted as soon as it becomes available on the workshop website, www.courses.fas.harvard.edu/~gov3009/fall02/ The Research Workshop in Applied Statistics is a forum for graduate students, faculty, and visiting scholars to present and discuss statistical innovations and applications in the social sciences. For more information, contact corr(a)fas.harvard.edu.