Differences in Perstistence in Aggregated and Disaggregated UK Stock Returns: A Reconciliation

Studies of the persistence in the returns series of UK stocks, using inter alia variance ratios, have documented clear differences between the relatively low levels of persistence in individual security returns and the relatively high levels of persistence in the returns of portfolios composed of these same securities. In this paper, I reconcile this contrast by showing that portfolio return variance ratios should not be expected to reflect (own) persistence levels in the component security returns, but instead should reflect a ‘cross‐persistence’ between the securities. I calculate synthetic portfolio variance ratios from measures of security return ‘cross‐persistence’ and find that they replicate closely the observed portfolio return variance ratios, which provides empirical support for the theoretical results.