Industry Classifications and Return Comovement

Posted: 14 Dec 2007

See all articles by Louis K.C. Chan

Louis K.C. Chan

University of Illinois at Urbana-Champaign - Department of Finance

Josef Lakonishok

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Bhaskaran Swaminathan

LSV Asset Management

Abstract

A company's industry affiliation is commonly used to construct homogeneous stock groupings for portfolio risk management, relative valuation, and peer-group comparisons. A variety of industry classification systems have been adopted, however, creating disagreements as to companies' industry assignments. This analysis of the Global Industry Classification System (GICS) and Fama-French system indicates that common movement in returns and operating performance resulting from industry effects is stronger for stocks of large companies than for those of small companies. Also, increasingly fine levels of disaggregation improve discrimination up to six-digit GICS codes, after which the benefits tail off. Stock groupings based on industry exhibit stronger out-of-sample homogeneity than groups formed from statistical cluster analysis.

Keywords: Portfolio Management: Equity Strategies, Asset Allocation

Suggested Citation

Chan, Louis K.C. and Lakonishok, Josef and Swaminathan, Bhaskaran, Industry Classifications and Return Comovement. Financial Analysts Journal, Vol. 63, No. 6, 2007. Available at SSRN: https://ssrn.com/abstract=1071164

Louis K.C. Chan (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-6391 (Phone)
217-244-3102 (Fax)

Josef Lakonishok

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-7185 (Phone)
217-244-3102 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Bhaskaran Swaminathan

LSV Asset Management ( email )

155 North Wacker Drive
Chicago, IL 60606
United States

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