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Do Industries Lead the Stock Market? Gradual Diffusion of Information and Cross-Asset Return Predictability

42 Pages Posted: 23 Nov 2003  

Walter N. Torous

Massachusetts Institute of Technology

Rossen I. Valkanov

University of California, San Diego (UCSD) - Rady School of Management

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 29, 2002

Abstract

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

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

Walter N. Torous

Massachusetts Institute of Technology ( email )

Center for Real Estate and Sloan School
Cambridge, MA 02138
United States

Rossen Valkanov (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858-534-0898 (Phone)

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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