Dual Industry Effects and Cross-Stock Predictability

Abstract

This paper introduces the Peer Index (PI), a measure capturing dual industry-related effects in cross-stock predictability: the overall strength of a firm’s peer group and its relative position within the peer group. PI robustly predicts future stock returns, earnings surprises, and earnings growth at both the industry and stock levels across short and longer horizons. Its predictive power persists even after controlling for expected returns derived from machine-learning models applied to firm-own characteristics. We provide evidence that markets underreact to peer-related information, with the PI effect stronger when information uncertainty is higher and investor attention lower, driving cross-stock predictability.

Keywords: cross-stock predictability, asset pricing, economic links, information aggregation JEL Classification: G11, G12, G14, industry effect

JEL Classification: G11, G12, G14