Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/201835
Authors: 
Schlag, Christian
Zeng, Kailin
Year of Publication: 
2019
Series/Report no.: 
SAFE Working Paper No. 256
Abstract: 
It has been documented that vertical customer-supplier links between industries are the basis for strong cross-sectional stock return predictability (Menzly and Ozbas (2010)).We show that robust predictability also arises from horizontal links between industries, i.e., from the fact that industries are competitors or offer products, which are substitutes for each other. These horizontally linked industries exhibit positively correlated fundamentals. The signal derived from this type of connectedness is the basis for significant alpha in sorted portfolio strategies, and informed investors take the related information into account when they form their portfolios. We thus provide evidence of return predictability based on a new type of economic links between industries not captured in previous studies.
Subjects: 
connected industries
information flow
return predictability
JEL: 
G12
E44
D81
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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