How Do Financial Markets React to Long Term Development of Industries?
29 Pages Posted: 19 Jan 2021
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: Suggested Citation