Peer Momentum

Abstract

Using recent advances in network theory, we estimate the intra-industry connectedness for US publicly traded companies going back to the 1920s. We develop a stock-level composite centrality measure that captures multiple dimensions of a stock's interdependence with its industry peers. Using our network and composite centrality estimates, we develop "peer momentum" trading strategies, which sort stocks on their industry peers' past month average returns weighted by the peers' influence in the industry. A "peripheral peer momentum" strategy that uses only peripheral stocks' influence as weights for the signal construction achieves an annualized Sharpe ratio of 0.65, survives a battery of robustness tests, and helps explain industry momentum.