Feedback Loops in Industry Trade Networks and the Term Structure of Momentum Profits

48 Pages Posted: 10 Dec 2016 Last revised: 7 Jul 2018

See all articles by Ali Sharifkhani

Ali Sharifkhani

University of Toronto - Rotman School of Management

Mikhail Simutin

University of Toronto - Rotman School of Management

Date Written: July 5, 2018

Abstract

Industries are economically linked through customer-supplier trade flows. We show theoretically and empirically that industry shocks propagating along this inter-sectoral trade network can feed back to the originating industry, causing an "echo" -- intermediate-term autocorrelation in returns. Adopting techniques from graph theory, we find that the strength of the trade network feedback is a crucial determinant of the echo effect in industry returns. Returns of the echo strategy implemented within high-feedback strength industries reach 1% monthly. Consistent with limited-information models, the relation between feedback strength and echo profits is strongest in industries with information diffusion frictions, such as low analyst coverage, along the feedback loop. Overall, our results identify inter-sectoral trade networks as important conduits of industry shocks and provide the first explanation for the echo effect.

Keywords: Industry trade networks, echo, stock returns, information diffusion, inter-sectoral input-output links, momentum, customer-supplier product market networks

JEL Classification: G12, G14, G17

Suggested Citation

Sharifkhani, Ali and Simutin, Mikhail, Feedback Loops in Industry Trade Networks and the Term Structure of Momentum Profits (July 5, 2018). Rotman School of Management Working Paper No. 2882770. Available at SSRN: https://ssrn.com/abstract=2882770 or http://dx.doi.org/10.2139/ssrn.2882770

Ali Sharifkhani

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Mikhail Simutin (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/simutin

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