Industry Information Diffusion and the Lead-Lag Effect in Stock Returns

Dice Center Working Paper No. 2003-23

43 Pages Posted: 11 Nov 2003

See all articles by Kewei Hou

Kewei Hou

Ohio State University (OSU) - Department of Finance

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Abstract

This paper argues that slow diffusion of common information is a leading cause of the lead-lag effect in stock returns. I find that the lead-lag effect is predominantly an intra-industry phenomenon: returns on big firms lead returns on small firms within the same industry. Once this effect is accounted for, little evidence of predictability across industries can be found. Furthermore, this effect is largely driven by sluggish adjustment to negative information. Industry leaders lead industry followers; value firms lead growth firms (within the same industry); firms with low idiosyncratic volatility lead their highly volatile industry peers, controlling for firm size. Small, volatile, less competitive and neglected industries experience a more pronounced lead-lag effect. Finally, the intra-industry lead-lag effect drives the industry momentum anomaly.

JEL Classification: G12, G14

Suggested Citation

Hou, Kewei, Industry Information Diffusion and the Lead-Lag Effect in Stock Returns. Dice Center Working Paper No. 2003-23, Available at SSRN: https://ssrn.com/abstract=463005 or http://dx.doi.org/10.2139/ssrn.463005

Kewei Hou (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

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