What is 'Cross-Sectional Analysis'

Cross-sectional analysis is a type of analysis that an investor, analyst or portfolio manager may conduct on a company in relation to that company's industry or industry peers. The analysis compares one company against the industry in which it operates, or directly against certain competitors in the same industry, in an attempt to assess performance and investment opportunities.

BREAKING DOWN 'Cross-Sectional Analysis'

When conducting a cross-sectional analysis, the analyst uses comparative metrics to identify the valuation, debt-load, future outlook and/or 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 investment choice among a group of competitors within the industry as a whole. When comparing the target firm to competitors, the analyst must be careful to consider the unique operating characteristics of each company, and how those characteristics will affect any comparative metrics used.

Analysts implement a cross-sectional analysis to identify special characteristics within a group of comparable organizations, rather than to establish relationships. This type of analysis 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.

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.

Examples of Cross-Sectional Analysis

Cross-sectional analysis is not used solely for analyzing a company; it can be used to analyze many different things in business. 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 analysis and found that factor timing skills are better among fund managers who use leverage to their advantage, and who manage funds 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 Fama and French Three Factor Model 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 regression analysis of the universe of common stocks in the CRSP database.   

  1. Stock Analysis

    Stock analysis is the evaluation of a particular trading instrument, ...
  2. Investment Analysis

    Investment analysis involves researching and evaluating securities ...
  3. Fundamental Analysis

    Fundamental analysis is the method of analyzing a security to ...
  4. Comparable Company Analysis - CCA

    A comparable company analysis (CCA) is a process used to evaluate ...
  5. Marginal Analysis

    Marginal analysis is an examination of the additional benefits ...
  6. Technical Analysis

    Technical analysis is a trading discipline employed to evaluate ...
Related Articles
  1. Investing

    Fundamental Analysis for Traders

    Find out how the fundamental analysis method can be applied strategically to increase profits.
  2. Trading

    Basics Of Technical Analysis

    Learn how chartists analyze the price movements of the market. We'll introduce you to the most important concepts in this approach.
  3. Investing

    Understanding Fundamental Vs. Technical Analysis

    The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental and technical analysis. Learn the core differences in these strategies and ...
  1. Is it better to use fundamental analysis, technical analysis, or quantitative analysis ...

    Understand the difference between fundamental, technical and quantitative analysis, and how each helps to evaluate long-term ... Read Answer >>
  2. What are some examples of ways that sensitivity analysis can be used?

    Understand the concept of sensitivity analysis and learn about the wide variety of disciplines to which it can be applied. Read Answer >>
  3. How is the ability to perform Activities of Daily Living (ADL) measured?

    Find out how to apply sensitivity analysis to your investment decisions, why sensitivity analysis might be useful and what ... Read Answer >>
  4. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  5. What are some of the better types of financial analysis software?

    Discover what features make for good financial analysis software, some popular options and why analysts need to pick the ... Read Answer >>
Trading Center