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Session Overview
APE-9: Momentum
Friday, 25/Aug/2017:
1:30pm - 3:00pm

Session Chair: Jennie Bai, Georgetown University
Location: SN163

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Feedback Loops in Industry Trade Networks and the Term Structure of Momentum Profits

Ali Sharifkhani, Mikhail Simutin

University of Toronto

Discussant(s): Jun Tu (Singapore Management University)

Industries are economically linked through customer-supplier trade flows. We show theoretically and empirically that industry shocks propagating along this inter-sectoral trade network can feed back to the originating industry, causing an "echo" -- intermediate-term autocorrelation in returns. Adopting techniques from graph theory, we find that the strength of the trade network feedback is a crucial determinant of the echo effect in industry returns. Returns of the echo strategy implemented within high-feedback strength industries exceed 1% monthly. Consistent with limited-information models, the relation between feedback strength and echo profits is strongest in industries with information diffusion frictions, such as low analyst coverage, along the feedback loop. Overall, our results identify inter-sectoral trade networks as important conduits of industry shocks and provide the first explanation for the echo effect.

EFA2017-1478-APE-9-Sharifkhani-Feedback Loops in Industry Trade Networks and the Term Structure.pdf

Geographic Momentum

Riccardo Sabbatucci1, Christopher A. Parsons2, Sheridan Titman3

1Stockholm School of Economics; 2UC San Diego; 3University of Texas at Austin

Discussant(s): Zhenyu Wang (Indiana University)

We document geographic momentum: a positive lead-lag stock return relation between neighboring firms operating in different sectors. Geographic momentum yields risk-adjusted returns of 5-6% per year, about half that observed for industry momentum. However, while industry momentum is strongest among thinly traded, small firms, and/or those with scant analyst following, geographic momentum is unrelated to these proxies for information processing. We propose an explanation linking this to the structure of the investment analyst business, which is organized by sector, rather than by geographic region

EFA2017-1604-APE-9-Sabbatucci-Geographic Momentum.pdf

Speed Matters: Limited Attention and Supply-Chain Information Diffusion

Michael Hertzel1, Ling Cen2, Christoph Maximilian Schiller2

1Arizona State University; 2University of Toronto

Discussant(s): Wenyu Wang (Indiana University)

Using the methodology of Hou and Moskowitz (2005), we develop a new measure of the speed of information diffusion along the supply chain. Using this measure, we find evidence that information diffuses more quickly when key market participants are less subject to limited attention constraints. Specifically, we find that the speed of information diffusion from customer to supplier stock returns is more rapid when analysts dual-cover and institutional investors cross-invest in the supplier and its principal customer. We rely on exogenous shocks to attention from regional flu epidemics and S&P 500 reconstitutions to establish causality. We demonstrate that our speed measure is useful in identifying customer momentum strategies and can be of value to managers who use information in stock prices to guide corporate decisions.

EFA2017-1467-APE-9-Hertzel-Speed Matters.pdf

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