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Horizontal industry relationships and return predictability

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  • Schlag, Christian
  • Zeng, Kailin

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.

Suggested Citation

  • Schlag, Christian & Zeng, Kailin, 2019. "Horizontal industry relationships and return predictability," SAFE Working Paper Series 256, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:256
    DOI: 10.2139/ssrn.3436006
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    Cited by:

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    3. Awijen, Haithem & Ben Zaied, Younes & Ben Lahouel, Béchir & Khlifi, Foued, 2023. "Machine learning for US cross-industry return predictability under information uncertainty," Research in International Business and Finance, Elsevier, vol. 64(C).
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    6. Delu Wang & Xun Xue & Yadong Wang, 2021. "Overcapacity Risk of China’s Coal Power Industry: A Comprehensive Assessment and Driving Factors," Sustainability, MDPI, vol. 13(3), pages 1-21, January.

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    More about this item

    Keywords

    connected industries; information flow; return predictability;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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