Autocorrelation and partial price adjustment

Robert M. Anderson, Kyong Shik Eom, Sang Buhm Hahn and Jong-Ho Park

Journal of Empirical Finance, 2013, vol. 24, issue C, 78-93

Abstract: Stock return autocorrelation contains spurious components—the nonsynchronous trading effect (NT) and bid–ask bounce (BAB)—and genuine components—partial price adjustment (PPA) and time-varying risk premia (TVRP). We identify a portion that can unambiguously be attributed to PPA, using three key ideas: theoretically signing and/or bounding the components; computing returns over disjoint subperiods separated by a trade to eliminate NT and greatly reduce BAB; and dividing the data period into disjoint subperiods to obtain independence for statistical power. Analyzing daily individual and portfolio return autocorrelations in sixteen years of NYSE intraday transaction data, we find compelling evidence that PPA is a major source of the autocorrelation.

Keywords: Stock return autocorrelation; Nonsynchronous trading; Partial price adjustment; Market; Microstructure; Open-to-close return (search for similar items in EconPapers)
JEL-codes: D40 D82 G12 G14 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:24:y:2013:i:c:p:78-93

DOI: 10.1016/j.jempfin.2013.08.003

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