Economic Links and Predictable Returns

46 Pages Posted: 6 Apr 2016  

Lauren Cohen

Harvard Business School; National Bureau of Economic Research (NBER)

Andrea Frazzini

AQR Capital Management, LLC

Date Written: May 23, 2007

Abstract

This paper finds evidence of return predictability across economically linked firms. We test the hypothesis that in the presence of investors subject to attention constraints, stock prices do not promptly incorporate news about economically related firms, generating return predictability across assets. We use a dataset of firms’ principal customers to identify a set of economically related firms, and show that stock prices do not incorporate news involving related firms, generating predictable subsequent price moves. A long/short equity strategy based on this effect yields monthly alphas of over 150 basis points.

The appendix to "Economic Links and Predictable Returns" can be found at http://ssrn.com/abstract=2758778.

Keywords: G10, G11, G14

JEL Classification: Economic links, customers, suppliers, inattention

Suggested Citation

Cohen, Lauren and Frazzini, Andrea, Economic Links and Predictable Returns (May 23, 2007). Available at SSRN: https://ssrn.com/abstract=2758776 or http://dx.doi.org/10.2139/ssrn.2758776

Lauren Cohen (Contact Author)

Harvard Business School ( email )

Rock Center 321
Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/lcohen

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrea Frazzini

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203-742-3894 (Phone)
203-742-3394 (Fax)

HOME PAGE: http://www.econ.yale.edu/~af227/

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