Empirical Analyses of Three Explanations for the Positive Autocorrelation of Short-Horizon Stock Index Returns

Empirical Analyses of Three Explanations for the Positive Autocorrelation of Short-Horizon Stock... This paper provides empirical analyses of three explanations for the observed positive autocorrelation of short-horizon stock index returns, using NYSE/AMEX and NASDAQ data. Results indicate that index autocorrelation cannot be substantially explained by either autocorrelated, time-varying expected returns, or nonsynchronous trading. The third explanation for index autocorrelation, the nonsynchronous information transfer hypothesis, states that stocks incorporate market-wide information on a nonsynchronous basis due to information and transaction costs. Evidence from analyses of mean returns on various portfolios following large returns on the S 500 futures contract, as well as regressions of portfolio returns on current and lagged futures returns, support this explanation. Small (large) firms collectively require approximately 7 (1-2) weeks to fully incorporate new market information on average, and this delayed impoundment accounts for the bulk of the observed autocorrelation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Empirical Analyses of Three Explanations for the Positive Autocorrelation of Short-Horizon Stock Index Returns

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Publisher
Springer Journals
Copyright
Copyright © 1997 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008216626861
Publisher site
See Article on Publisher Site

Abstract

This paper provides empirical analyses of three explanations for the observed positive autocorrelation of short-horizon stock index returns, using NYSE/AMEX and NASDAQ data. Results indicate that index autocorrelation cannot be substantially explained by either autocorrelated, time-varying expected returns, or nonsynchronous trading. The third explanation for index autocorrelation, the nonsynchronous information transfer hypothesis, states that stocks incorporate market-wide information on a nonsynchronous basis due to information and transaction costs. Evidence from analyses of mean returns on various portfolios following large returns on the S 500 futures contract, as well as regressions of portfolio returns on current and lagged futures returns, support this explanation. Small (large) firms collectively require approximately 7 (1-2) weeks to fully incorporate new market information on average, and this delayed impoundment accounts for the bulk of the observed autocorrelation.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Sep 29, 2004

References

  • Implications of microstructure theory for empirical research on stock price behavior
    Cohen, K.J.; Hawawini, G.A.; Maier, S.F.; Schwartz, R.A.; Whitcomb, D.K.

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