More and more research suggests that the past return of one firm’s stock can predict the stock returns of other, connected firms—with momentous implications for firm networks and investors. “Such cross-stock return momentum is found among stocks connected by the same industry, supply chain, and geographic location,” explain Jialin Yu of HKUST and a colleague, whose study sheds new light on this important “lead–lag” relation.

Although many researchers have asked how one stock’s return can predict another’s, conspicuous gaps in understanding remain. “Have previous studies of cross-stock momentum pinpointed the main features of the lead-lag linkages across stocks,” ask the authors, “or are there important features still hidden in the data?”

Size and time may be such features. “Larger stocks matter more for predicting the future returns of other stocks in the same industry than smaller stocks,” say the researchers. This predictability also appears to vary with time. “Our results suggest a more prominent role for asymmetry in cross-stock linkages,” the authors tell us.

This asymmetry is important because it distinguishes cross-stock return momentum from factor momentum—the phenomenon whereby stocks that have performed well in the past continue to do so, while those that have performed poorly continue to underperform.

Extending previous research, Yu and colleague thus provide a more nuanced view of how stocks interact and how these interactions can influence returns. Their insights have critical practical implications; for example, investors may be able to enhance their returns by focusing on cross-stock relationships rather than relying solely on traditional factor momentum strategies. “Our analysis can be applied to firm networks to understand their implications for asset pricing and beyond,” the authors conclude.