Empirical Evidence Of Sector Rotation: A Case Study Of Old Economy Industry And New Economy Industry

Abstract

This research examines whether variations in returns exist between Old economy industry and New economy industry when the U.S. economy changed from expansion to contraction. The two-year period, 1999-2000 is used for examining sector rotation. Further, this study tends to investigate whether the lack of consistent time-series performance presents within an industry. Our sample industries include Oil Exploration and Production industry, Oil Well Service and Equipment industry, and Integrated Oil industry to be the representative Old economy industries. Business-to-Business software industry is an example of New economy industry. In general, our results support our hypothesis that industry factor is an important basis for substantial returns variations between New economy industry and Old economy industry. Business-to-Business software industry reports statistically significant positive Jensen Alpha of 199.66% and 483% in third quarter of 1999 and fourth quarter of 1999, respectively. However, Business-to-Business software industry shows deteriorated Jensen Alpha approaching the end of 2000. This study also documents considerable changes of quarterly Jensen Alpha for three Oil industries from time to time. Empirical evidence indicates the apparent lack of consistency in returns within an industry over time. Moreover, consistent with the oil gas futures prices patterns, three Oil industries have underperformed the market in 1998 and significantly outperformed the market in 2000.