Do industries lead the stock market? Evidence from an emerging stock market

Abstract

Examining the gradual information diffusion hypothesis of Hong et al. (2007)in an emerging market context, we show that industry returns possess predictive information regarding the direction of the aggregate stock market in Borsa Istanbul, both in- and out-of-sample, and that the predictive power of industries is often magnified by crisis conditions. Several industries, including basic materials and consumer staples, have out-of-sample predictive power over the aggregate market, although out-of-sample predictability cannot be exploited to extract economic gains based on the direction of industry returns. Industry information emanating from the US stock market has significant spillover effects on Turkish industry returns, creating an opening for industry investment strategies for local investors. We show that foreign participation in the stock market facilitates the diffusion of information from US industries to Turkish industries and that the economic benefits from spillover effects can be as high as 60 percent on annual basis.