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Market Segmentation and Cross‐predictability of Returns
Author(s) -
MENZLY LIOR,
OZBAS OGUZHAN
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2010.01578.x
Subject(s) - predictability , market segmentation , business , stock market , stock (firearms) , institutional investor , financial economics , monetary economics , financial market , economics , finance , corporate governance , mechanical engineering , paleontology , physics , horse , marketing , quantum mechanics , engineering , biology
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.