Supply Chain and Predictability of Return

Document Type : Research Paper

Authors

Department of Financial Management, Faculty of Management and Accounting, Farabi Campus of University of Tehran, Qom, Iran.

Abstract

Customer and supplier companies (which form a supply chain) have long-term economic relationships and affect each other. In this study, we answer to the question that “whether past returns of the customer (supplier) company can predict the future return of the supplier (customer) company”. To answer this question, we have investigated the predictability of return (or lead-lag relationship) at the industry-level in 10 supply chains of the Tehran Stock Exchange from March 2015 to March 2020 using the vector autoregression model. We found that a considerable numbers of supply chains, specifically, 6 out of 10 supply chains in our sample show the lead-lag relationship. In 3 supply chains, customer industry returns lead (or predict) supplier industry returns. Whereas, in other 3 supply chains, supplier industry returns lead customer industry returns. These observed lead-lag relationships (or predictable returns) across industries provide some evidence of inefficiency in the Tehran Stock Exchange. In addition, we can use these predictable returns to construct profitable trading strategies.

Keywords

References

  • [1] Cohen, L., & Frazzini, A. (2008). Economic Links and Predictable Returns. Journal of Finance, 63(4), 1977-2011.
  • [2] Menzly, L., & Ozbas, O. (2010). Market Segmentation and Cross-predictability of Returns. Journal of Finance, 65(4), 1555-1580.
  • [3] Moskowitz, T., & Grinblatt, M. (1999). Do Industries Explain Momentum?. Journal of Finance, 54(4), 1249-1290.
  • [4] Boudoukh, J., Richardson, M., & Whitelaw, R. (1994). A tale of three schools: Insights of autocorrelations of short-horizon stock returns. Review of Financial Studies, 7(3), 539-573.
  • [5] Lo, A., & MacKinlay, A. (1990). When are contrarian profits due to stock market overreaction?. Review of Financial Studies, 3(2), 175-205.
  • [6] Brennan, M., Jegadeesh, N., & Swaminathan, B. (1993). Investment analysis and the adjustment of stock prices to common information. Review of Financial Studies, 6(4), 799-824.
  • [7] Badrinath, S., Kale, J., & Noe, T. (1995). Of shepherds, sheep, and the cross-autocorrelations in equity returns. Review of Financial Studies, 8(2), 401-430.
  • [8] Chordia, T., & Swaminathan, B. (2000). Trading volume and cross-autocorrelations in stock returns. The Journal of Finance, 55(2), 913-935.
  • [9] Hou, (2007). Industry information diffusion and the Lead–lag effect in stock returns. Review of Financial Studies, 20(4), 1113-1138.
  • [10] Fama, E., & MacBeth, J. (1973). Risk, Return, and Equilibrium: Empirical Tests. Journal of Political Economy, 81(3), 607-639.
  • [11] Shahrur, H., Becker, Y., & Rosenfeld, D. (2010). Return Predictability along the Supply Chain: The International Evidence. Financial Analysts Journal, 66(3), 60-77.
  • [12] Zhu, H. (2014). Implications of limited investor attention to customer–supplier information transfers. The Quarterly Review of Economics and Finance, 54(3), 405-416.
  • [13] Chen, L., Zhang, G., & Zhang, W. (2016). Return Predictability in Corporate Bond Market along the Supply Chain. Journal of Financial Markets, 29(C), 66-86.
  • [14] Li, C., Li, R., Diao, X., & Wu, C. (2019). Market segmentation and supply-chain predictability: evidence from China. Accounting & Finance, 60(2), 1531-1562.
  • [15] Chen, R., Gao, Z., & Zhang, X. (2019). Return Predictability: Evidence from the US-China Supply Chain. The Journal of Portfolio Management, 45(4), 143-151.
  • [16] Li, C., Wu, C., & Zhou, C. (2021). Forecasting equity returns: The role of commodity futures along the supply chain. Journal of Futures Markets, 41(1), 46-71.
  • [17] Merton, R. (1987). A Simple Model of Capital Market Equilibrium with Incomplete Information. The Journal of Finance, 42(3), 483-510.
  • [18] Hong, H., & Stein, J. (1999). A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets. The Journal of Finance, 54(6), 2143-2184.
  • [19] Hirshleifer, D., & Teoh, S.H. (2003). A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets. Journal of Accounting and Economics, 36(1-3), 337-386.
  • [20] Chenery, H., & Watanabe, T. (1958). International Comparisons of the Structure of Production. Econometrica, 26(4), 487-521.
  • [21] Sims, C. (1980). Macroeconomics and Reality. The Econometric Society, 48(1), 1-48.
Advances in Industrial Engineering
Volume 55, Issue 4
October 2021
Pages 323-333

Files

Share

How to cite

Statistics