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Publications
  • August 2008
  • Article
  • Journal of Finance

Economic Links and Predictable Returns

By: Lauren Cohen and Andrea Frazzini
  • Format:Print
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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​.)
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About The Author

Lauren H. Cohen

Finance
→More Publications

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    • 2023
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    Too Many Managers: The Strategic Use of Titles to Avoid Overtime Payments

    By: Lauren Cohen, Umit Gurun and N. Bugra Ozel
    • 2022
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    Hidden Alpha

    By: Lauren Cohen, Manuel Amman, Alexander Cochardt and Stephan Heller
    • October 2022 (Revised January 2023)
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    Century Bank: Closing Time?

    By: Lauren Cohen, Grace Headinger and Bill Kwon
More from the Authors
  • Too Many Managers: The Strategic Use of Titles to Avoid Overtime Payments By: Lauren Cohen, Umit Gurun and N. Bugra Ozel
  • Hidden Alpha By: Lauren Cohen, Manuel Amman, Alexander Cochardt and Stephan Heller
  • Century Bank: Closing Time? By: Lauren Cohen, Grace Headinger and Bill Kwon
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