RT Journal Article
T1 Cointegration, information transmission, and the lead-lag effect between industry portfolios and the stock market
A1 Troster, Víctor Emilio
A1 Penalva, José S.
A1 Taamouti, Abderrahim
A1 Wied, Dominik
AB This paper shows that lagged information transmission between industry port-folio and market prices entailscointegration. We analyze monthly industry portfolios in the US market for the period 1963–2015. We findcointegration between six industry portfolio and market prices. We show that the equilibrium error, thelong-term common factor between industry portfolio and market cumulative returns, has strong predictive power forexcess industry portfolio returns. In line with gradual information diffusion across connected industries, theequilibrium error proxies for changes in the investment oppor-tunity set that lead to industry return predictabilityby informed investors. Forecasting models including the equilibrium error have superior forecasting performancerelative to models without it, illustrating the importance of cointegration between the industry portfolio andmarket prices. Overall, our findings have important implications for investment and risk-management decisions,since the out-of-sample explanatory power of the equilibrium error is economically meaningful for making optimalportfolio allocations.
PB Wiley
SN 0277-6693
YR 2021
FD 2021-02-01
LK https://hdl.handle.net/10016/34747
UL https://hdl.handle.net/10016/34747
LA eng
NO Ministerio de Educación, Cultura y Deporte, Grant/Award Number:ECO2017-83255-C3-2-P
DS e-Archivo
RD 27 jul. 2024