Do industries lead aggregate stock market? : an examination of the gradual information diffusion hypothesis for Australia

Using the monthly data for more than 1700 Australian stocks over the period of 1990 to 2009, we extend the work of Hong et al (JFE, 2007) to investigate whether industrial portfolio excess returns predict the aggregate market. We find that a few numbers of industries, such as General Retailers, Industrial Engineering and Oil Equipment & Services, significantly lead the market even with the control of those well-recognized market predictors. However, we do not find that the ability of an industry to predict the market is closely related to its capacity to forecast economic growth as documented by Hong et al (2007) for the U.S. markets; instead, we find that the ability of an industry to lead the market is significantly moderated by the proxies for investor recognition, providing evidence in support of the gradual-information-diffusion hypothesis. We also find that the predictive power of industrial portfolio returns is weaker during the period of economic recession