Can Industry‐level Trade Linkage Predict Stock Returns?

Abstract

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.

Stock Return Autocorrelations: Evidence from the Asia‐Pacific Stock Markets

“…Most literature suggests that cross‐country financial crises are the result of close economic and financial correlations among different countries due to globalization. As a result, the literature focuses mostly on countries with similar degrees of economic development (Fidrmuc and Korhonen, 2010; Hadjimichalis, 2011; Rousseau and Wachtel, 2011; Lim, 2020). However, other studies suggest that the impact of a cross‐country financial crisis is felt only in the countries that are geographically correlated (Lan et al ., 2015).…”