How Do Financial Markets React to Long Term Development of Industries?

29 Pages Posted: 19 Jan 2021

See all articles by M.H.M. Versaevel

M.H.M. Versaevel

Tilburg University - Tilburg University School of Economics and Management; PGGM

Date Written: December 18, 2020

Abstract

We develop quantitative methodologies to classify industries by their development phase and apply this to analyze whether stock markets over- or underreact to industries shifting to another phase of development. We find little evidence for such market inefficiencies. On the contrary, a substantial portion of the (negative) excess returns for growing (declining) industries are earned in the run-up to the phase shift. These results suggest that stock markets reflect the information with regards to industrial development in stock market prices in the run-up to an industry entering a new phase. Consequently, bubbles at the industry level may be more of an exception than a rule and more difficult to identify ex-ante than sometimes thought.

Keywords: Industrial Development, Asset Pricing, Market Efficiency, Product Life Cycle, Overreaction, Underreaction, Growth Industries, Declining Industries

JEL Classification: G14, L16

Suggested Citation

Versaevel, M.H.M., How Do Financial Markets React to Long Term Development of Industries? (December 18, 2020). Available at SSRN: https://ssrn.com/abstract=3751439 or http://dx.doi.org/10.2139/ssrn.3751439

M.H.M. Versaevel (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

PGGM ( email )

Utrechtseweg 44
P.O.Box 117
Zeist, 3700 AC
Netherlands
+31302771842 (Phone)

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