Lead-lag patterns in the Spanish and other European equity markets

The predictability of market performance is a matter of interest not only for traders and investors in financial market instruments but also for those attempting to understand the dynamics of these markets. According to the efficient market hypothesis, the price of an asset is a perfect reflection of all the information available, and consequently, it is not possible to capitalize on “undervalued or overvalued” asset; thus making market price prediction practically impossible. However, there are several groups of reasons (for example, transaction costs) that have led some economists to believe that prices are at least partially predictable. In this context, this study tries to evaluate the gradual information diffusion theory proposed by Hong et al. (2007) where industries with valuable, fundamental economic information tend lead the equity market as well as the economic activity. This hypothesis is not supported in the case of Spain, where company characteristics, and especially size, may be more relevant in understanding lead-lag patterns.