Can Large Industries Predict the Stock Market?
World Applied Sciences Journal, Vol. 14, No. 3, pp. 443-448, 2011
6 Pages Posted: 17 Oct 2011
Date Written: 2011
This paper empirically examines the hypothesis that diffusion of information is not uniform across all sectors of a market. Large industries or industries where trading volume is substantially larger attract attention of a large number of investors who in turn make these industries informationally efficient. Such industries are expected to help in predicting the movements of a stock market. For testing the above hypothesis, the study uses monthly data of 3 industries listed at the Karachi Stock Exchange over the period 2001 to 2008. These include Oil and Gas, Chemical and Cement industries. In separate regressions, current market returns are regressed on the lagged portfolio returns of the given industries and other control variables. The results do not provide any evidence that these industries can predict movements of the stock market. However, there is some evidence that dividend yield can forecast market returns up to two months. The paper contributes to the literature as this is the first-ever study on this topic in Pakistan.
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