46 Pages Posted: 5 Jul 2000
Date Written: February 24, 2000
Better proxies for the information about future returns contained in firm characteristics such as size, book-to-market equity, cash flow-to-price, percent change in employees, and various past return measures are obtained by breaking these explanatory variables into two industry-related components. The components represent (1) the difference between firms' own characteristics and the average characteristics of their industries (within-industry variables), and (2) the average characteristics of firms' industries (across-industry variables). Each variable is reliably priced within-industry and measuring the variables within-industry produces more precise estimates than measuring the variables in their more common form. Contrary to Moskowitz and Grinblatt , we find that within-industry momentum (i.e., the firm's past return less the industry average return) has predictive power for the firm's stock return beyond that captured by across-industry momentum. We also document a significant short-term (one-month) industry momentum effect which remains strongly significant when we restrict the sample to only the most liquid firms.
JEL Classification: G11, G12
Suggested Citation: Suggested Citation
Asness, Clifford S. and Porter, R. Burt and Stevens, Ross L., Predicting Stock Returns Using Industry-Relative Firm Characteristics (February 24, 2000). Available at SSRN: https://ssrn.com/abstract=213872 or http://dx.doi.org/10.2139/ssrn.213872
By Owen Lamont