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Imperfect Information and Cross-Autocorrelation among Stock Prices

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  • Chan, Kalok
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    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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    Bibliographic Info

    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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    Cited by:
    1. Kristjanpoller Rodríguez Werner, 2013. "Anomalías en la autocorrelación de rendimientos y la importancia de los periodos de no transacción en mercados latinoamericanos," Contaduría y Administración:Revista Internacional, Accounting and Management: International Journal, vol. 58(1), pages 37-62, enero-mar.
    2. Albuquerque, Rui & H. Bauer, Gregory & Schneider, Martin, 2009. "Global private information in international equity markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 94(1), pages 18-46, October.
    3. Säfvenblad, Patrik, 1997. "On the Damodaran Estimator of Price Adjustment Coefficients," Working Paper Series in Economics and Finance 208, Stockholm School of Economics.
    4. Gregory H. Bauer & Clara Vega, 2004. "The Monetary Origins of Asymmetric Information in International Equity Markets," Working Papers 04-47, Bank of Canada.
    5. 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.
    6. Masahiro Watanabe, 2003. "A Model of Stochastic Liquidity," Yale School of Management Working Papers, Yale School of Management ysm385, Yale School of Management.
    7. Anderson, Robert M. & Eom, Kyong Shik & Hahn, Sang Buhm & Park, Jong-Ho, 2013. "Autocorrelation and partial price adjustment," Journal of Empirical Finance, Elsevier, Elsevier, vol. 24(C), pages 78-93.
    8. 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.
    9. 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.
    10. Majumder, Debasish, 2013. "Towards an efficient stock market: Empirical evidence from the Indian market," Journal of Policy Modeling, Elsevier, Elsevier, vol. 35(4), pages 572-587.
    11. Ezatollah Abbasian & Vahid Abbasion & Mehdi Moradpour Oladi, 2008. "Interactions of returns and volatilities among different sizes of stocks: a Survey in Tehran Stock Exchange," Iranian Economic Review, Economics faculty of Tehran university, vol. 13(1), pages 1-16, spring.
    12. 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.
    13. 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, New York University, Leonard N. Stern School of Business- 99-011, New York University, Leonard N. Stern School of Business-.
    14. Cho, Jin-Wan & Shin, Jhinyoung & Singh, Rajdeep, 2004. "The generality of spurious predictability," Finance Research Letters, Elsevier, Elsevier, vol. 1(4), pages 203-214, December.
    15. Rui Albuquerque & Gregory Bauer & Martin Schneider, 2004. "Characterizing Asymmetric Information in International Equity Markets," International Finance, EconWPA 0405005, EconWPA.

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