A closer look at co-movements among stock returns
AbstractCorrelation among financial assets is widely recognized; however, the mechanics of the relationship are not well understood. This paper investigates the microstructure of the co-movement of stock returns. The goal is to improve our understanding of correlation among stock returns by examining the conditions under which asset returns co-move on an intra-day basis. The methodology combines a traditional lead-lag model with a modified or pseudo-error correction model. Empirical evidence is presented to suggest the speed of adjustment between paired asset intra-day returns is a function of asymmetric information. Specifically, the wider an asset's spread, the faster the asset will converge to the intra-day returns of other similar assets. This result is consistent with partial adjustment model presented by Chan (Chan, K. (1993). Imperfect information and cross-autocorrelation among stock prices. The Journal of Finance:1211-1230.) which suggests market makers gain from monitoring other market makers in periods of uncertainty.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economics and Business.
Volume (Year): 61 (2009)
Issue (Month): 4 (July)
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Web page: http://www.elsevier.com/locate/jeconbus
Price dynamics Pseudo-error correction models Lead-lag models and pairs trading;
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