Thu, 19 Oct 2023
Lecture Room 4, Mathematical Institute
Qi Jin

We propose a method to detect linear and nonlinear lead-lag relationships in stock returns.  Our approach uses pairwise Lévy-area and cross-correlation of returns to rank the assets from leaders to followers. We use the rankings to construct a portfolio that longs or shorts the followers based on the previous returns of the leaders, and the stocks are ranked every time the portfolio is rebalanced. The portfolio also takes an offsetting position on the SPY ETF so that the initial value of the portfolio is zero. Our data spans from 1963 to 2022 and we use an average of over 500 stocks to construct portfolios for each trading day. The annualized returns of our lead-lag portfolios are over  20%, and the returns outperform all lead-lag benchmarks in the literature. There is little overlap between the leaders and the followers we find and those that are reported in previous studies based on market capitalization, volume traded, and intra-industry relationships. Our findings support the slow information diffusion hypothesis; i.e., portfolios rebalanced once a day consistently outperform the bidiurnal, weekly, bi-weekly, tri-weekly, and monthly rebalanced portfolios.

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