Feedback Loops in Industry Trade Networks and the Term Structure of Momentum Profits : Evidence from Japan

Using U.S, data, Sharifkhani and Simutin (2021) show that industry shocks propagating along this intersectoral trade network can feed back to the originating industry, causing an “echo”–intermediate-term autocorrelation in returns. This "echo" effect is stronger in industries with strong shock feedback. We test whether the same results of Sharifkhani and Simutin (2021) are observed in Japan. In Japan, momentum profits are less likely to be observed than in other countries, and there are special inter-firm transaction relationships among firms represented by keiretsu relationships. Due to these factors, Japan is a suitable setting for testing the general validity of the echo effect. We observe the same results in Japan as Sharifkhani and Simutin (2021). This result suggests that momentum profits can occur in Japan under certain conditions and the result of Sharifkhani and Simutin (2021) is generally valid