Stock Return Autocorrelation is Not Spurious

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

Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley

Abstract: We decompose stock return autocorrelation into 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),using four key ideas: theoretically signing or bounding the components; computing returns over disjoint subperiods separated by a trade to eliminate NT and greatly reduce BAB; dividing the data period into disjoint subperiods to obtain independent measures of autocorrelation; and computing the portion of the autocorrelation that can be unambiguously attributed to PPA. We analyze daily individual and portfolio return autocorrelations in ten years’ NYSE transaction data and find compelling evidence that the PPA is a major source of the autocorrelation.

Keywords: Stock return autocorrelation; nonsynchronous trading; partial price adjustment (search for similar items in EconPapers)
Date: 2007-07-28
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