Horizontal industry relationships and return predictability

Christian Schlag and Kailin Zeng

No 256, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: 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.

Keywords: connected industries; information flow; return predictability (search for similar items in EconPapers)
JEL-codes: D81 E44 G12 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:256

DOI: 10.2139/ssrn.3436006

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