Can economic links explain lead–lag relations across firms?

Abstract

AbstractThis article studies the driving sources of cross‐firm lead–lag relations in returns which are generated by the Granger‐causality test with a long estimation window. The authors observed that economic links such as customer–supplier relationships and peer effects only account for a small share of the frequently observed cross‐firm lead–lag relations. Instead, most of the cross‐firm lead–lag relations are driven by several classical factors. On average, 95% of the cross‐firm lead–lag relations disappear after controlling for the three classical Fama–French factors, “betting against beta” and a few industry factors such as utility, oil, construction, and finance. This article represents novel evidence that classical factors designed for explaining the contemporaneous stock returns also contains important information for future returns. Investors trading on the signals generated by the relevant classical factors can obtain significant and positive returns.