Horizontal industry relationships and return predictability

  • 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.

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Author:Christian Schlag, Kailin Zeng
Parent Title (English):SAFE working paper series ; No. 256
Series (Serial Number):SAFE working paper series (256)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2019
Year of first Publication:2019
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2019/08/13
Tag:connected industries; information flow; return predictability
Issue:This version: August 9, 2019
Page Number:56
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht