Horizontal Industry Relationships and Return Predictability
Zusammenfassung
It has been documented that vertical customer-supplier links between industries are the basis for strong cross-sectional stock return predictability (Menzly and Ozbas (2010)). We show that robust predictability also arises from horizontal links between industries, i.e., from the fact that industries are competitors or offer products, which are substitutes for each other. These horizontally linked industries exhibit positively correlated fundamentals. The signal derived from this type of connectedness is the basis for significant alpha in sorted portfolio strategies, and informed investors take the related information into account when they form their portfolios. We thus provide evidence of return predictability based on a new type of economic links between industries not captured in previous studies.
Forschungsbereich
Financial Markets
Schlagworte
connected industries, information flow, return predictability
JEL-Klassifizierung
G12, E44, D81
Thema
Systematic Risk
Corporate Finance
Saving and Borrowing
Corporate Finance
Saving and Borrowing
Beziehungen
1
Publikationstyp
Working Paper
Link zur Publikation
Collections
- LIF-SAFE Working Papers [334]