Nikiforos Laopodis
Associate Professor, Fairfield University, USA.Dynamic Linkages between Industries and
Stock Market
We examine the predictive power of seventeen large industry
portfolio returns on the United States stock market for the period 1957-
- We find a number of interesting results. First, we see that most
industry portfolios provide valuable information to the stock market as
early as two months ahead. Second, this result holds true when
controlled for a number of important predictors of economic activity
such as spread, dividend yield, inflation and unemployment. Third, we
find that many industry returns exhibited significant explanatory
power for all of the fundamental variables, albeit to varying degrees.
Finally, when we estimated a vector autoregressive model with the
industry and the market returns, we detected varying patterns of
reaction of each industry to shocks from the stock market. Furthermore,
we examined the industries’ responses to market shocks during two
expansions (one in the 1960s and one in the early 1970s) and two
contractions (the most recent one and the one from 1973 to 1975). Our
findings show that the returns’ reactions to such shocks are very
different, as some industries reacted in a more and others in a less
turbulent manner in each contraction and expansion. In addition,
differential impacts surfaced during different expansions and
contractions but no common responses in either contractions or
expansions were detected in any of the industries we examined.