Feedback loops in industry trade networks and the term structure of momentum profits

Ali Sharifkhani and Mikhail Simutin

Journal of Financial Economics, 2021, vol. 141, issue 3, 1171-1187

Abstract: Industries are economically linked through customer-supplier trade flows. We show that industry shocks propagating along this intersectoral trade network can feed back to the originating industry, causing an “echo”–intermediate-term autocorrelation in returns. Adopting techniques from graph theory, we find that the strength of the trade network feedback is a crucial determinant of the echo effect in industry returns. Returns of the echo strategy implemented within high-feedback strength industries reach 1% monthly. Consistent with limited-information models, the relation between feedback strength and echo profits is strongest in industries with information diffusion frictions, such as low analyst coverage, along the feedback loop. Overall, our results identify intersectoral trade networks as important conduits of industry shocks and provide the first explanation for the echo effect.

Keywords: Industry trade networks; Momentum echo; Information diffusion; Intersectoral input-output links (search for similar items in EconPapers)
JEL-codes: G12 G14 G17 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:141:y:2021:i:3:p:1171-1187

DOI: 10.1016/j.jfineco.2021.04.028

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