Market Segmentation and Cross‐predictability of Returns
Published: 7/15/2010, Volume: 65, Issue: 4 | DOI: 10.1111/j.1540-6261.2010.01578.x | Cited by: 503
LIOR MENZLY, OGUZHAN OZBAS
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.
Integrating Factor Models
Published: 4/4/2023, Volume: 78, Issue: 3 | DOI: 10.1111/jofi.13226 | Cited by: 35
DORON AVRAMOV, SI CHENG, LIOR METZKER, STEFAN VOIGT
This paper develops a comprehensive framework to address uncertainty about the correct factor model. Asset pricing inferences draw on a composite model that integrates over competing factor models weighted by posterior probabilities. Evidence shows that unconditional models record near‐zero probabilities, while postearnings announcement drift, quality‐minus‐junk, and intermediary capital are potent factors in conditional asset pricing. Out‐of‐sample, the integrated model performs well, tilting away from subsequently underperforming factors. Model uncertainty makes equities appear considerably riskier, while model disagreement about expected returns spikes during crash episodes. Disagreement spans all return components involving mispricing, factor loadings, and risk premia.