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Lead-Lag Relationships in International Stock Markets Revisited: Are They Exploitable?

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  • Andreas Gruener
  • Christian Finke

Abstract

This paper re-examines empirical lead-lag relationships in stock portfolios sorted by size, analyst coverage and institutional ownership across seven major developed markets. We find that lead-lag relationships continue to exist in a majority of countries. A simple trading strategy that exploits the return predictability based on lead-lag relationships yields significant abnormal returns in several markets. However, the abnormal returns quickly decline when transaction costs are introduced and become insignificant for one-way transaction costs of more than 40 basis points. Thus, lead-lag relationships are probably not exploitable in practice and will continue to exist in the future.

Suggested Citation

  • Andreas Gruener & Christian Finke, 2018. "Lead-Lag Relationships in International Stock Markets Revisited: Are They Exploitable?," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 9(1), pages 8-30, January.
    • Handle: RePEc:jfr:ijfr11:v:9:y:2018:i:1:p:8-30
    DOI: 10.5430/ijfr.v9n1p8
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