Does the lead-lag effect exist in stock markets?

Fan, Ningyuan; Fan, Zhi‐Ping; Li, Yongli; Li, Meng

doi:10.1080/13504851.2021.1897068

Cited by 2 publications

(2 citation statements)

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“…Fan et al ( 2022 ) investigated the lead-lag effect from a complex network perspective using data from January 1, 2018, to December 31, 2018, on 218 stocks of the Shanghai Shenzhen CSI 300 index in the Chinese stock market. They detected a lead-lag effect between individual stocks, which was explained by several driving factors such as market capitalization, trading volume, and financial performance.…”

Section: Literature Reviewmentioning

confidence: 99%

“…(Asafo-Adjei et al 2021 ). The identification of lead-lag network structures and stock characteristics could help practitioners, such as investors and fund managers, identify the information that matters (Fan et al 2022 ) and may allow yield enhancement, possibly even arbitrage, through trading futures in some markets (Copeland and Copeland 1998 ). Furthermore, according to the “wake-up calls” theory, a financial crisis in a given country is a call for investors in another country to acquire information about the risk of exposure to a macro shock in the latter country (Forbes 2012 ; Ahnert and Bertsch 2022 ).…”

Section: Introductionmentioning

confidence: 99%

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Industry return lead-lag relationships between the US and other major countries

2023

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In this study, we analyze the lead-lag relationships between the US industry index and those of six other major countries from January 1973 to May 2021. We identify the leading role played by the US internationally by showing that the weekly returns of US industries, especially the US basic materials and energy industries, significantly Granger cause the returns of most other countries’ industries, suggesting that non-US industries react with some delay to new information. This delayed reaction is even more noticeable during periods of recession in the US when cross-country correlations are higher. This implies that the ability of the lagged returns of US industries to predict industries’ returns from other countries is even more pronounced when the US experienced an economic recession. A similar asymmetric relationship is found between the volatility of US industries and that of industries in other markets. The analysis of causality in the distribution of returns and volatility shows that causality runs mainly from the US to other countries, particularly in the presence of extreme negative shocks. Finally, we demonstrate that our predictions are valuable to real-world investors. Long-short strategies generate sizable and statistically significant alphas, and a constant relative risk-averse investor obtains certainty equivalent returns well above the risk-free rate.

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Section: Literature Reviewmentioning

confidence: 99%