Lead-lag Effects between Stocks Intra-industry: Evaluating Market Efficiency and Providing Trading Strategy
Objective: The efficient market hypothesis (EMH) states that stock prices reflect all available information and price changes (or return) should be unpredictable. But the lead-lag effect is a phenomenon that provides the predictability of return in the stock market. Examining the lead-lag relationsh...
| Main Authors: | , , |
|---|---|
| Format: | Article |
| Language: | fas |
| Published: |
University of Tehran
2021-11-01
|
| Series: | تحقیقات مالی |
| Subjects: | |
| Online Access: | https://jfr.ut.ac.ir/article_85051_99e8b198776d62639906e3d15e410ac0.pdf |
| Summary: | Objective: The efficient market hypothesis (EMH) states that stock prices reflect all available information and price changes (or return) should be unpredictable. But the lead-lag effect is a phenomenon that provides the predictability of return in the stock market. Examining the lead-lag relationship between stocks, in addition to evaluating market efficiency, provides investors with useful trading strategies.Methods: This study has investigated the lead-lag effect between stocks within 20 industries of the Tehran Stock Exchange (which cover 75% of the market capital) from 2015 to 2020 using the vector autoregression (VAR) model.Results: From 20 industries in our sample, 13 industries show the lead-lag effect. In 10 industries, the return of small stocks leads to the return of big stocks within the same industry. Whereas, in the other 3 industries, the return of big stocks leads to the return of small stocks within the same industry. In addition, a stronger lead-lag effect has been observed in the computer, transportation, and metal products industries (which are relatively small industries).Conclusion: These observed lead-lag relationships (or predictable returns) between stocks intra-industry show a systemic inefficiency in the Tehran Stock Exchange market. Also, the results show that in some industries of the Tehran Stock Exchange, there are potentially profitable trading strategies. |
|---|---|
| ISSN: | 1024-8153 2423-5377 |