Lead-lag Effects between Stocks Intra-industry: Evaluating Market Efficiency and Providing Trading Strategy

Document Type : Research Paper


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

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

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


Objective: The efficient market hypothesis (EMH) states that stock prices reflect all available information and price changes (or return) should be unpredictable. But the lead-lag effect is a phenomenon that provides the predictability of return in the stock market. Examining the lead-lag relationship between stocks, in addition to evaluating market efficiency, provides investors with useful trading strategies.
Methods: This study has investigated the lead-lag effect between stocks within 20 industries of the Tehran Stock Exchange (which cover 75% of the market capital) from 2015 to 2020 using the vector autoregression (VAR) model.
Results: From 20 industries in our sample, 13 industries show the lead-lag effect. In 10 industries, the return of small stocks leads to the return of big stocks within the same industry. Whereas, in the other 3 industries, the return of big stocks leads to the return of small stocks within the same industry. In addition, a stronger lead-lag effect has been observed in the computer, transportation, and metal products industries (which are relatively small industries).
Conclusion: These observed lead-lag relationships (or predictable returns) between stocks intra-industry show a systemic inefficiency in the Tehran Stock Exchange market. Also, the results show that in some industries of the Tehran Stock Exchange, there are potentially profitable trading strategies.


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