Predictability and Underreaction in Industry-Level Returns: Evidence from Commodity Markets

47 Pages Posted: 16 Feb 2012 Last revised: 12 Sep 2013

See all articles by Mohammad R. Jahan-Parvar

Mohammad R. Jahan-Parvar

Board of Governors of the Federal Reserve System

Andrew Vivian

Loughborough University

Mark E. Wohar

University of Nebraska at Omaha

Date Written: September 11, 2013

Abstract

This paper finds significant evidence that commodity price changes can predict industry-level returns for horizons between one trading day and up to six trading weeks (30 days). We find that for the 1985-2010 period, 40 out of 49 U.S. industries can be predicted by at least one commodity. Our findings are consistent with Hong and Stein’s (1999) “underreaction hypothesis”. Unlike other papers in the literature, we pinpoint the length of underreaction by using daily data. We provide a comprehensive examination of the return linkages among 25 commodities and 49 industries. This enables us to present a more detailed investigation of underreaction and investor inattention hypotheses. Our results indicate modest out-of-sample forecast ability. Finally, we implement data-mining robust methods to assess the statistical significance of industry returns reactions to commodity price changes; these results confirm there is evidence that commodity data can predict equity returns more than four trading weeks ahead.

Keywords: Asset pricing, Commodity markets, Equity markets, Industry-level returns, Information and market efficiency, Predictability, Underreaction

JEL Classification: G12, G14, G15, E44

Suggested Citation

Jahan-Parvar, Mohammad R. and Vivian, Andrew and Wohar, Mark E., Predictability and Underreaction in Industry-Level Returns: Evidence from Commodity Markets (September 11, 2013). Available at SSRN: https://ssrn.com/abstract=2005365 or http://dx.doi.org/10.2139/ssrn.2005365

Mohammad R. Jahan-Parvar (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/site/mrjahan/

Andrew Vivian

Loughborough University ( email )

The Business School
Ashby Road
Loughborough LE11 3TU
Great Britain

Mark E. Wohar

University of Nebraska at Omaha ( email )

Department of Economics
6708 Pine Street MH 332S
Omaha, NE 68182
United States
402-554-3712 (Phone)
402-554-2853 (Fax)

HOME PAGE: http://cba.unomaha.edu/faculty/mwohar/WEB/homepage.html

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