Verification of Lead-Lag Effect in Financial Markets by the Adaptive Elastic Net Regression

The anomalies of returns have been reported against efficient market hypothesis. Momentums and reversals have been investigated and verified intensively, related to various trading strategies. Lead-lag effect, unlike the momentums and reversals, is a financial phenomena, in which price action between different assets shows delay with a time lag originated from information asymmetry. Previous researches have reported the lead-lag effects can be investigated in both inter and cross industrial sectors of the US stock market. In this study, we verify whether the lead-lag effect can be observed in global stock markets by means of adaptive elastic net regression. Experimental studies for major world indices reveal that long-short portfolios based on the lead-lag effect generate positive returns on both weekly and monthly rebalances.