What is Cross-Sectional Analysis?

Cross-sectional analysis is a type of analysis where an investor, analyst or 澳洲幸运5官方开奖结果体彩网:portfolio manager compares a particular company to its industry peers. Cross-sectional analysis may focus on a single company for head-to-head analysis with its biggest competitors or it may approach it from an industry-wide lens to identify companies with a particular strength. Cross-sectional analysis is often deployed in an attempt to assess performance and investment opportunities using data points that are beyond the usual 澳洲幸运5官方开奖结果体彩网:balance sheet numbers.

How Cross-Sectional Analysis Works

When conducting a cross-sectional analysis, the analyst uses comparative metrics to identify the 澳洲幸运5官方开奖结果体彩网:valuation, debt-load, future outlook and/or 澳洲幸运5官方开奖结果体彩网:operational efficiency of a target company. This allows the analyst to evaluate the target company's efficiency in these areas, and to make the best invest𝕴ment choice among a group of competitors within the industry as a whol♊e.

Analysts implement a cross-sectional analysis to identify special characteristics within a group of comparable organizations, rather than to establish relationships. Often cross-sectional analysis will emphasize a particular area, such as a company's 澳洲幸运5官方开奖结果体彩网:war chest, to expose hidden areas of strength and weakness in the sector. This type of anal𝔍ysis is based on information-gathering and seeks to understand the "what" instead of the "why." Cross-sectional analysis allows a researcher to form assumptions, and then test their hypothesis using research methods.

The Difference Between Cro🐼ss-Sectional Analysis and Tim🧸e Series Analysis

Cross-sectional analysis is one of the two overarching comparison methods for stock analysis. Cross-sectional analysis looks at data collected at a single point in time, rather than over a period of time. The analysis begins with the establishment of research goals and the definition of the variables that an analyst wants to measure. The next step is to identify the cross-section, such as a group of peers or an industry, and to set the specific point in time being assessed. The final step is to conduct analysis, based on the cross-section and the variables, and come to a conclusion on the performance of a company or organization. Essentially, cross-sectional analysis shows an investor which company is best given the metri𝕴cs she cares about.

Time series analysis, also known as trend analysis, focuses in on a single company over time. In this case, the company is being judged in the context of its past performance. Time series analysis shows an investor whether the company is doing better or worse than before by the measures she cares about. Often these will be classics like 澳洲幸运5官方开奖结果体彩网:earning per share (EPS), debt-to-equity, 澳洲幸运5官方开奖结果体彩网:free cash flow and so on. In practice, investors will usually use a combination of time series analysis and cross-sectional analysis before making a decision. For example, looking at 🌳the EPS overtime and then also checking the industry benc𒁏hmark EPS.

Examples of Cross-Sectional Analysis

Cross-sectional analysis is not used solely for analyzing a company; it can ꧅be used to analyze many different aspects of ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚbusiness. For example, a study released on July 18, 2016, by the Tinbergen Institute Amsterdam (TIA) measured the factor timing ability of hedge fund managers. Factor timing is the ability for hedge fund mangers to time the market correctly when investing, and to take advantage of market movements such as recessions or expansions.

The study used cross-sectional anal🅘ysis and found that factor timing skills are better among fund managers who use leverage to their advantage, and who manage fund❀s that are newer, smaller and more agile, with higher incentive fees and a smaller restriction period. The analysis can help investors select the best hedge funds and hedge fund managers.

The 澳洲幸运5官方开奖结果体彩网:Fama and French Three Factor M꧋odel credited with identifying the value and small cap premiums is the result of cross-sectional analysis. In this case, the financial economists Eugene Fama and Kenneth French conducted a cross-sectional 澳洲幸运5官方开奖结果体彩网:regression analysis of the universe of common stocks in th🌃e 🌠CRSP database.