Decoding Cross-Stock Predictability: Peer Strength versus Firm-Peer Disparities

55 Pages Posted: 31 May 2024

See all articles by Doron Avramov

Doron Avramov

Reichman University - Interdisciplinary Center (IDC) Herzliyah

Shuyi Ge

Nankai University - Department of Finance

Shaoran Li

Peking University

Oliver B. Linton

University of Cambridge

Date Written: May 31, 2024

Abstract

This paper introduces two novel stock-level indices-the Peer Index (PI) and the Peer-Deviation Index (PDI)-utilizing regularized regressions to capture economic relationships among firms. The PI measures the relative strength of the industry group, while the PDI assesses a firm's relative position within its industry. Both indices forecast returns robustly, excluding microcaps, and consistently over long horizons. Their predictive power reveals the market's insufficiency in decoding peer-relevant information, offering fresh insights into the sources of cross-stock predictability and the economic links influencing asset prices.

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

JEL Classification: G11, G12, G14

Suggested Citation

Avramov, Doron and Ge, Shuyi and Li, Shaoran and Linton, Oliver B., Decoding Cross-Stock Predictability: Peer Strength versus Firm-Peer Disparities (May 31, 2024). Available at SSRN: https://ssrn.com/abstract=4849902 or http://dx.doi.org/10.2139/ssrn.4849902

Doron Avramov

Reichman University - Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 4610101
Israel

HOME PAGE: http://faculty.idc.ac.il/davramov/

Shuyi Ge (Contact Author)

Nankai University - Department of Finance ( email )

94 Weijin Road
Tianjin, 300071
China

Shaoran Li

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, 100871
China

Oliver B. Linton

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

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