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New Trading Practices and Short-run Market Efficiency

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  • Kenneth A. Froot
  • Andre F. Perold

Abstract

We document a large decrease in autocorrelation and increase in variance of recent short-run returns on several broad stock market indexes, over the 1983-89 period, 15-minute returns went from being highly positively serially correlated to practically uncorrelated. Over the past twenty years, daily and weekly autocorrelations have also fallen, we use transactions data to decompose short-run index autocorrelation into three components: bid-ask bounce, nontrading effects, and noncomtemporaneous cross-stock correlations in specialists' quotes. The first two factors do not explain the autocorrelation's decline. We argue that new trading practices have improved the processing of market-wide information, and that the recent decreases in autocorrelation and increases in volatility simply reflect these improvements.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3498.

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Date of creation: Nov 1990
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Publication status: published as Revised in Journal of Futures Markets, vol 15, Oct 1995, pp 731-766.
Handle: RePEc:nbr:nberwo:3498

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  1. Atchison, Michael D & Butler, Kirt C & Simonds, Richard R, 1987. " Nonsynchronous Security Trading and Market Index Autocorrelation," Journal of Finance, American Finance Association, vol. 42(1), pages 111-18, March.
  2. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September.
  3. A. Craig MacKinlay, Krishna Ramaswamy, 1988. "Index-Futures Arbitrage and the Behavior of Stock Index Futures Prices," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 137-158.
  4. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
  5. Andrew W. Lo & A. Craig MacKinlay, 1989. "When are Contrarian Profits Due to Stock Market Overreaction?," NBER Working Papers 2977, National Bureau of Economic Research, Inc.
  6. Harris, Lawrence E & Gurel, Eitan, 1986. " Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures," Journal of Finance, American Finance Association, vol. 41(4), pages 815-29, September.
  7. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
  8. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
  9. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
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Cited by:
  1. repec:fth:prinin:289 is not listed on IDEAS
  2. Pischke, Jorn-Steffen, 1995. "Individual Income, Incomplete Information, and Aggregate Consumption," Econometrica, Econometric Society, vol. 63(4), pages 805-40, July.
  3. Campbell, John Y & Kim, Sangjoon & Lettau, Martin, 1998. "Dispersion and Volatility in Stock Returns: An Empirical Investigation," CEPR Discussion Papers 1923, C.E.P.R. Discussion Papers.
  4. Kenneth A. Froot & Andre F. Perold & Jeremy C. Stein, 1991. "Shareholder Trading Practices and Corporate Investment Horizons," NBER Working Papers 3638, National Bureau of Economic Research, Inc.
  5. Sias, Richard W. & Starks, Laura T., 1997. "Return autocorrelation and institutional investors," Journal of Financial Economics, Elsevier, vol. 46(1), pages 103-131, October.

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