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Imperfect Information and Cross-Autocorrelation among Stock Prices

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Author Info
 Chan, Kalok
Abstract

The author develops a model to explain why stock returns are positively cross-autocorrelated. When marketmakers observe noisy signals about the value of their stocks but cannot instantaneously condition prices on the signals of other stocks, which contain marketwide information, the pricing error of one stock is correlated with the other signals. As marketmakers adjust prices after observing true values or previous price changes of other stocks, stock returns become positively cross-autocorrelated. If the signal quality differs among stocks, the cross-autocorrelation pattern is asymmetric. The author shows that both own- and cross-autocorrelations are higher when market movements are larger. Copyright 1993 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 48 (1993)
Issue (Month): 4 (September)
Pages: 1211-30
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Handle: RePEc:bla:jfinan:v:48:y:1993:i:4:p:1211-30

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  1. Rui Albuquerque & Gregory Bauer & Martin Schneider, 2004. "Characterizing Asymmetric Information in International Equity Markets," International Finance 0405005, EconWPA. [Downloadable!]
  2. Albuquerque, Rui & Bauer, Gregor H & Schneider, Martin, 2006. "Global Private Information in International Equity Markets," CEPR Discussion Papers 5819, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Albuquerque, Rui & de Francisco, Eva & Marques, Luis, 2006. "Marketwide Private Information in Stocks: Forecasting Currency Returns," CEPR Discussion Papers 5604, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Joel Hasbrouck & Duane J. Seppi, 1998. "Common Factors in Prices, Order Flows and Liquidity," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-011, New York University, Leonard N. Stern School of Business-. [Downloadable!]
  5. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2005. "The joint dynamics of liquidity, returns, and volatility across small and large firms," Staff Reports 207, Federal Reserve Bank of New York. [Downloadable!]
  6. Säfvenblad, Patrik, 1997. "On the Damodaran Estimator of Price Adjustment Coefficients," Working Paper Series in Economics and Finance 208, Stockholm School of Economics. [Downloadable!]
  7. Gregory H. Bauer & Clara Vega, 2006. "The monetary origins of asymmetric information in international equity markets," International Finance Discussion Papers 872, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  8. Robert A. Connolly & Christopher T. Stivers, 2000. "Evidence on the Economics of Equity Return Volatility Clustering," Econometric Society World Congress 2000 Contributed Papers 1575, Econometric Society. [Downloadable!]
  9. Daxue Wang, 2006. "Cross-Autocorrelation of Dual-Listed Stock Portfolio Returns: Evidence from the Chinese Stock Market," Computing in Economics and Finance 2006 182, Society for Computational Economics. [Downloadable!]
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