Influence of market states on industry returns

Abstract

This empirical study considers the impact of market states on future industry returns. I investigate whether an industry’s past relative performance in the same market state as the current one predicts the industry’s future performance. The significant results from the new four-state dynamic model, helps substantiate the theory that certain industries are better to invest in at different times of the market cycle. I argue that the results provide strong evidence that market states predict future industry returns.