CAN INDUSTRY RETURNS PREDICT COUNTRY INDICES? EVIDENCE FROM EMERGING MARKETS

This paper analyzes whether industry returns can predict country indices in a less informative environment. In comparison to the developed markets (see, e.g., Hong, Torous, and Valkanov (2007)), monthly returns of fewer industries in 7 Asian emerging markets provide a significant leading indicator of market returns in the subsequent periods. However, such relationship cannot be linked to economic fundamentals and tends to cluster in concentrated industries, consistent with the view that emerging capital markets are less informative, less diversified in the scope of industries, and more prone to behavioral bias.