Correlation 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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Volume (Year): 61 (2009) Issue (Month): 4 (July) Pages: 279-294 Download reference. The following formats are available: HTML
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