Lead-lag effects in Australian industry portfolios

Tariq Haque
The University of Adelaide
Australia

Abstract:
Hou (2007) shows that in the United States returns to stocks with high market capitalizations, in a given industry, lead returns to stocks in the same industry with smaller market capitalizations. We show similar lead-lag effects or positive cross-correlations in Australian industry portfolios in both daily and weekly returns. The magnitude of lead-lag effects is larger in Australia reflecting the greater importance of large stocks as indicator stocks for the industries they lead. These results amplify the significance of industries in asset-pricing and behavioural finance models and also suggest that a within-industry switch from the large stocks of an industry to the smaller stocks, may be profitable.