Cross-Firm Information Flows and the Predictability of Stock Returns

77 Pages Posted: 11 May 2013 Last revised: 21 Mar 2016

See all articles by Anna Scherbina

Anna Scherbina

Brandeis University

Bernd Schlusche

Board of Governors of the Federal Reserve System

Date Written: January 6, 2015

Abstract

We identify all return leader-follower pairs among individual stocks using Granger causality regressions. Thus-identified leaders can reliably predict their followers' returns out of sample, and the return predictability works at the level of individual stocks rather than industries. Our results indicate that, independent of its size, any firm may emerge as a return leader by being at the center of an important news development that has ramifications for other firms. Indeed, stocks undergoing news-generating developments see an increase in the number of stocks whose returns they lead.

Keywords: Information Leadership, Lead-Lag Effect, Corporate News Announcements, Limited Attention, Market Efficiency

JEL Classification: G10, G12, G14, G17

Suggested Citation

Scherbina, Anna D. and Schlusche, Bernd, Cross-Firm Information Flows and the Predictability of Stock Returns (January 6, 2015). Available at SSRN: https://ssrn.com/abstract=2263033 or http://dx.doi.org/10.2139/ssrn.2263033

Anna D. Scherbina (Contact Author)

Brandeis University ( email )

415 South Street
Waltham, MA 02453
United States

HOME PAGE: http://sites.google.com/a/brandeis.edu/anna-scherbina/

Bernd Schlusche

Board of Governors of the Federal Reserve System ( email )

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

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