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Market Segmentation and Cross-predictability of Returns

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  • LIOR MENZLY
  • OGUZHAN OZBAS
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    Abstract

    We present evidence supporting the hypothesis that due to investor specialization and market segmentation, value-relevant information diffuses gradually in financial markets. Using the stock market as our setting, we find that (i) stocks that are in economically related supplier and customer industries cross-predict each other's returns, (ii) the magnitude of return cross-predictability declines with the number of informed investors in the market as proxied by the level of analyst coverage and institutional ownership, and (iii) changes in the stock holdings of institutional investors mirror the model trading behavior of informed investors. Copyright (c) 2010 the American Finance Association.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2010.01578.x
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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 65 (2010)
    Issue (Month): 4 (08)
    Pages: 1555-1580

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    Handle: RePEc:bla:jfinan:v:65:y:2010:i:4:p:1555-1580

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    Cited by:
    1. Foucault, Thierry & Fresard, Laurent, 2014. "Learning from peers' stock prices and corporate investment," Journal of Financial Economics, Elsevier, vol. 111(3), pages 554-577.
    2. Gurun, Ayfer, 2013. "Business strategy and financial consequences: The case of antidumping filings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 127-138.
    3. Stefano Giglio & Kelly Shue, 2013. "No News is News: Do Markets Underreact to Nothing?," NBER Working Papers 18914, National Bureau of Economic Research, Inc.
    4. Rizova, Savina, 2013. "Trade momentum," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 258-293.
    5. Jinjarak, Yothin, 2013. "Supply Chains and Credit-Market Shocks: Some Implications for Emerging Markets," ADBI Working Papers 443, Asian Development Bank Institute.

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