Victor Troster
Cointegration, Information Transmission, and the Lead-Lag Effect between Industry Portfolios and the Stock Market
Troster, Victor; Penalva, Jose; Taamouti, Abderrahim; Wied, Dominik
Authors
Jose Penalva
Professor Abderrahim Taamouti abderrahim.taamouti@durham.ac.uk
Visiting Fellow
Dominik Wied
Abstract
This paper shows that lagged information transmission between industry portfolio and market prices entails cointegration. We analyze monthly industry portfolios in the US market for the period 1963-2015. We find cointegration between six industry portfolio and market prices. We show that the equilibrium error, the long-term common factor between industry portfolio and market cumulative returns, has strong predictive power for excess industry portfolio returns. In line with gradual information diffusion across connected industries, the equilibrium error proxies for changes in the investment opportunity set that lead to industry return predictability by informed investors. Forecasting models including the equilibrium error have superior forecasting performance relative to models without it, illustrating the importance of cointegration between the industry portfolio and market 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 optimal portfolio allocations.
Citation
Troster, V., Penalva, J., Taamouti, A., & Wied, D. (2021). Cointegration, Information Transmission, and the Lead-Lag Effect between Industry Portfolios and the Stock Market. Journal of Forecasting, 40(7), 1291-1309. https://doi.org/10.1002/for.2767
Journal Article Type | Article |
---|---|
Acceptance Date | Dec 27, 2020 |
Online Publication Date | Feb 1, 2021 |
Publication Date | 2021-11 |
Deposit Date | Jan 13, 2021 |
Publicly Available Date | Feb 1, 2023 |
Journal | Journal of Forecasting |
Print ISSN | 0277-6693 |
Electronic ISSN | 1099-131X |
Publisher | Wiley |
Peer Reviewed | Peer Reviewed |
Volume | 40 |
Issue | 7 |
Pages | 1291-1309 |
DOI | https://doi.org/10.1002/for.2767 |
Public URL | https://durham-repository.worktribe.com/output/1281541 |
Files
Accepted Journal Article
(195 Kb)
PDF
Copyright Statement
This is the peer reviewed version of the following article: Troster, Victor Penalva, Jose Taamouti, Abderrahim & Wied, Dominik (2021). Cointegration, Information Transmission, and the Lead-Lag Effect between Industry Portfolios and the Stock Market. Journal of Forecasting 40(7): 1291-1309, which will be published in final form at http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1099-131X. This article may be used for non-commercial purposes in accordance With Wiley-VCH Terms and Conditions for self-archiving.
You might also like
Covid-19 Control and the Economy: Test, Test, Test
(2021)
Journal Article
Measuring Granger Causality in Quantiles
(2020)
Journal Article
A better understanding of Granger causality analysis: A big data environment
(2018)
Journal Article
The information content of forward moments
(2019)
Journal Article
Downloadable Citations
About Durham Research Online (DRO)
Administrator e-mail: dro.admin@durham.ac.uk
This application uses the following open-source libraries:
SheetJS Community Edition
Apache License Version 2.0 (http://www.apache.org/licenses/)
PDF.js
Apache License Version 2.0 (http://www.apache.org/licenses/)
Font Awesome
SIL OFL 1.1 (http://scripts.sil.org/OFL)
MIT License (http://opensource.org/licenses/mit-license.html)
CC BY 3.0 ( http://creativecommons.org/licenses/by/3.0/)
Powered by Worktribe © 2024
Advanced Search