42 Pages Posted: 23 Nov 2003
Date Written: November 29, 2002
We test the hypothesis that the gradual diffusion of information across asset markets leads to cross-asset return predictability. Using thirty-four industry portfolios and the broad market index as our test assets, we establish several key results. A number of industries such as retail, services, commercial real estate, metal, and petroleum lead the stock market by up to two months. Importantly, an industry's ability to lead the market is correlated with its propensity to forecast various indicators of economic activity such as industrial production growth. Consistent with our hypothesis, these findings indicate that the market reacts with a delay to information in industry returns about its fundamentals because information diffuses only gradually across asset markets.
Notes: Previously titled "Do Industries Lead the Stock Market? Inattention, Delayed Reaction and Cross-Asset Return Predictability"
Suggested Citation: Suggested Citation
Torous, Walter N. and Valkanov, Rossen I. and Hong, Harrison G., Do Industries Lead the Stock Market? Gradual Diffusion of Information and Cross-Asset Return Predictability (November 29, 2002). AFA 2004 San Diego Meetings; Anderson School of Management Working Paper. Available at SSRN: https://ssrn.com/abstract=326422 or http://dx.doi.org/10.2139/ssrn.326422
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