Can Industry‐level Trade Linkage Predict Stock Returns?

In this paper, I test whether cross‐predictability exists among trade‐linked industries across international borders and explore possible explanations for this. I find strong evidence of cross‐border stock return predictability among trade‐linked industries. A trading strategy of buying industry por...

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Bibliographic Details
Published in:Asia-Pacific journal of financial studies 2020, 49(2), , pp.234-271
Main Author: Lim, Tae‐Hoon
Format: Article
Language:English
Subjects:
Customer‒supplier relations
Institutional ownership
International equity
International trade
Return predictability
Trade linkage
경영학
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Summary:In this paper, I test whether cross‐predictability exists among trade‐linked industries across international borders and explore possible explanations for this. I find strong evidence of cross‐border stock return predictability among trade‐linked industries. A trading strategy of buying industry portfolios for which trade‐linked industry had high returns, and shorting industry portfolios for which trade‐linked industry had low returns, yields an annualized return of 12%. Such returns cannot be explained by known risk factors and are different from industry momentum. I find some evidence that counters the information segmentation explanation for cross‐predictability and find support for illiquidity as a new channel of explanation.
ISSN:2041-9945
2041-6156
DOI:10.1111/ajfs.12292