Cross-Asset Shock Diffusion: A Reproducible Test of Residual Underreaction, Shock Coherence, and Trading Economics

This paper examines whether differences in the speed with which traded assets respond to a common market shock can predict subsequent relative returns. The public framework combines a lagged rolling factor model with Absorption Gap (AG), which measures an asset’s response error, and Shock Coherence (SC), which characterizes the market state on that date. The study evaluates the signal using executable next-open timing, explicit transaction costs, dependence-aware inference, randomized-signal benchmarks, chronological diagnostics, alternative normalizations, portfolio sensitivity analysis, and machine-learning extensions. The sample contains 24 ETFs from 4 January 2010 through 28 August 2026, with eight factor proxies excluded from the 16-asset traded cross-section. The paper connects an economic hypothesis about heterogeneous information absorption to an executable quantitative trading framework and provides a reproducible research design for testing cross-sectional predictability, market-state conditioning, and implementation economics. The contribution is both empirical and methodological: it develops a transparent framework for measuring relative shock absorption, separates cross-sectional signal information from market-state effects, and emphasizes timing integrity, transaction costs, robustness, falsification, and reproducibility in quantitative strategy research.