Does prior stock return correlation predict future stock return correlation?

Jonathan Ross ()
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Jonathan Ross: Western Kentucky University

SN Business & Economics, 2023, vol. 3, issue 9, 1-15

Abstract: Abstract Using the sample time period 1950–2020, the historical average stock return correlation of a portfolio of firms is a strong positive predictor of that same portfolio’s future average stock return correlation. The prediction improves when more prior monthly returns are used. The prediction holds after controlling for macroeconomic factors. The prediction also is much better for portfolios comprised of small firms relative to large firms. The prediction holds not only for the CRSP market of firms, but also for various-sized randomly chosen sub-samples of that market.

Keywords: Stock return correlation; Predicting future returns; Return variances (search for similar items in EconPapers)
JEL-codes: G11 G30 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s43546-023-00551-z

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