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Dynamic cross-autocorrelation in stock returns

Jyri Kinnunen

Journal of Empirical Finance, 2017, vol. 40, issue C, 162-173

Abstract: I investigate whether the cross-autocorrelation pattern of US small- and large-firm returns changes with the variance of returns using an exponential vector autoregressive model with volatility. The model allows the testing of dynamic cross-autocorrelation effects, while controlling for own time-varying autoregressive coefficients. Using daily and weekly data from 1965 to 2015, a constant cross-autocorrelation pattern is rejected. Returns on a large-firm portfolio are found to lead returns on a small-firm portfolio. The lead-lag relation changes over time with the variance of the large-firm returns. Traditional vector autoregressions with constant cross-autoregressive coefficients appear to be overly restrictive when testing lead-lag relations in stock markets.

Keywords: Autocorrelation; Cross-autocorrelation; Volatility; Vector autoregressive model; Exponential autoregressive model (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.jempfin.2016.08.005

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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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