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Portfolio size, non-trading frequency and portfolio return autocorrelation

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  • Chelley-Steeley, Patricia L.
  • Steeley, James M.

Abstract

In this paper we re-examine the relationship between non-trading frequency and portfolio return autocorrelation. We show that in portfolios where security specific effects have not been completely diversified, portfolio autocorrelation will not increase monotonically with increasing non-trading, as indicated in Lo and MacKinlay (1990). We show that at high levels of non-trading, portfolio autocorrelation will become a decreasing function of non-trading probability and may take negative values. We find that heterogeneity among the means, variances and betas of the component securities in a portfolio can act to increase the induced autocorrelation, particularly in portfolios containing fewer stocks. Security specific effects remain even when the number of securities in the portfolio is far in excess of that considered necessary to diversify security risk.

Suggested Citation

  • Chelley-Steeley, Patricia L. & Steeley, James M., 2014. "Portfolio size, non-trading frequency and portfolio return autocorrelation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 56-77.
    • Handle: RePEc:eee:intfin:v:33:y:2014:i:c:p:56-77
    DOI: 10.1016/j.intfin.2014.07.001
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    Cited by:

    1. Roberto Ortiz & Mauricio Contreras & Marcelo Villena, 2015. "On the Efficient Market Hypothesis of Stock Market Indexes: The Role of Non-synchronous Trading and Portfolio Effects," Papers 1510.03926, arXiv.org.

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    More about this item

    Keywords

    Portfolio return autocorrelation; Non-trading; Diversification;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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