Does History Repeat Itself? Business Cycle and Industry Returns

62 Pages Posted: 4 Jul 2016 Last revised: 11 Nov 2019

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Alex Hsu

Georgia Institute of Technology - Scheller College of Business

Linghang Zeng

Babson College - Finance Division

Date Written: November 9, 2019

Abstract

Industries with higher historical business cycle regime Sharpe ratios (RSR) have higher regime-dependent expected returns. Conditional on whether output gap is positive or negative, an out-of-sample long-high-RSR and short-low-RSR sector rotation strategy generates 14.02% annualized alpha in Fama-French five-factor model during 1985-2014. Industry momentum and related anomalies are unlikely to be the source of alpha. Firms in long portfolios have stronger fundamentals, more upward analyst forecast revisions, and more positive forecast errors. Our results suggest that investors don't fully incorporate business cycle variation in cash flow growth and highlight the importance of business cycle on the cross-section of industry returns.

Keywords: Business Cycle, Industry Returns, Sector Rotation Strategy, Cash Flow News

JEL Classification: E3, G1

Suggested Citation

Chava, Sudheer and Hsu, Alex and Zeng, Linghang, Does History Repeat Itself? Business Cycle and Industry Returns (November 9, 2019). Georgia Tech Scheller College of Business Research Paper No. 17-24; Journal of Monetary Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2803585 or http://dx.doi.org/10.2139/ssrn.2803585

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Alex Hsu

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
4043851123 (Phone)

Linghang Zeng (Contact Author)

Babson College - Finance Division ( email )

Babson Park, MA 02457-0310
United States

HOME PAGE: http://sites.google.com/view/linghang-zeng

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