An analysis of co-movements in industrial sector indices over the last 30 years

This paper analyses the Dow Jones daily industry sector total return indices for the last 18 years and the Data Stream daily industry sector price indices over the past 30 years. We show how broad movements in both sets of data can be described in terms of five underlying variables and how interactions between individual industrial sectors can be revealed using structural equation modeling. In addition we show how these factors can be used to construct investible factor portfolios that can be used to take a position in the securities market and how normal investment tools such as the capital asset pricing models should be used to construct an optimal investment portfolio. Whilst the methodologies used are somewhat mathematical our aim is not to explain the math, but to show a way in which the tools are applied and the results interpreted. Copyright Springer Science+Business Media New York 2015