Volume 49, Issue 2 p. 234-271
Original Article

Can Industry-level Trade Linkage Predict Stock Returns?

Tae-Hoon Lim

Corresponding Author

Tae-Hoon Lim

Division of Language and Trade, Hankuk University of Foreign Studies, Seoul, Republic of Korea

Corresponding author: Division of Language and Trade, HUFS, 107 Imun-ro, Dongdaemun-gu, Seoul 02450, Republic of Korea. Tel: +82-2-2173-8807, email: thlim@hufs.ac.kr.

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First published: 13 April 2020
Citations: 1
This paper is based on my PhD dissertation. I am grateful to my advisor David T. Ng and my committee members Edith Liu and Sanjeev Bhojraj for their encouragement and guidance. I am also grateful for comments from Andrew Karolyi, George Gao, Kee-Hong Bae, Louis Gagnon, Selim Topaloglu, an anonymous referee, and seminar participants at Cornell University, Konkuk University, Korea Institute of Finance, Korea Institute for International Economic Policy, Pacific Investment Management Company, Queen’s University, and CAFM 2014. All remaining errors are mine. This work was supported by the Hankuk University of Foreign Studies Research Fund.

Abstract

In this paper, I test whether cross-predictability exists among trade-linked industries across international borders and explore possible explanations for this. I find strong evidence of cross-border stock return predictability among trade-linked industries. A trading strategy of buying industry portfolios for which trade-linked industry had high returns, and shorting industry portfolios for which trade-linked industry had low returns, yields an annualized return of 12%. Such returns cannot be explained by known risk factors and are different from industry momentum. I find some evidence that counters the information segmentation explanation for cross-predictability and find support for illiquidity as a new channel of explanation.

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