Publications
Publications
- August 2008
- Journal of Finance
Economic Links and Predictable Returns
By: Lauren Cohen and Andrea Frazzini
Abstract
This paper finds evidence of return predictability across economically linked firms. We test the hypothesis that in the presence of investors subject to attention constraints, stock prices do not promptly incorporate news about economically related firms, generating this return predictability across assets. We use a dataset of firms' principal customers to identify a set of economically related firms, and show that stock prices do not incorporate news involving related firms, generating predictable subsequent price moves. A long/short equity strategy based on this effect yields monthly alphas of over 150 basis points, or over 18 percent per year.
Keywords
Economics; Price; Assets; Analytics and Data Science; Customers; Stocks; Equity; Strategy; Investment Return; Forecasting and Prediction
Citation
Cohen, Lauren, and Andrea Frazzini. "Economic Links and Predictable Returns." Journal of Finance 63, no. 4 (August 2008). (Winner of Smith Breeden Prize for the Best Paper Published in the Journal of Finance in Asset Pricing (Distinguished Paper) 2008. Winner of Chicago Quantitative Alliance Academic Paper Competition. First Prize presented by Chicago Quantitative Alliance. Winner of BSI Gamma Foundation Research Grant presented by BSI Gamma Foundation.)