Information Spillovers and Size-sorted Portfolios: Structural Evidence from Australia

George Milunovich

No 610, Research Papers from Macquarie University, Department of Economics

Abstract: A portfolio of small capitalization stocks formed from securities listed on the Australian Stock Exchange (ASX) fails to adjust to market-wide news instantaneously and displays a significant amount of predictability from lagged returns on large and medium size firms. Despite apparently large excess payoffs generated by filter rules, the lagged adjustments become economically insignificant once transaction costs associated with taking a position in each constituent security are taken into account. I suggest that the observed predictability is largely due to a lack of small cap portfolio derivatives which could facilitate index arbitrage and enhance price discovery in the Australian market.

Keywords: size-sorted portfolios; ASX; structural GARCH; predictability (search for similar items in EconPapers)
JEL-codes: C30 C32 G10 (search for similar items in EconPapers)
Pages: 19 pages.
Date: 2006-12
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