Economic Links and Predictable Returns

46 Pages Posted: 6 Apr 2016

See all articles by Lauren Cohen

Lauren Cohen

Harvard University - Business School (HBS); 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 University - Business School (HBS) ( email )

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

National Bureau of Economic Research (NBER) ( email )

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Andrea Frazzini

AQR Capital Management, LLC ( email )

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United States
203-742-3894 (Phone)
203-742-3394 (Fax)

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

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