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Behavioralize This! International Evidence on Autocorrelation Patterns of Stock Index and Futures Returns

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Author Info
Dong-Hyun Ahn
Jacob Boudoukh
Matthew Richardson
Robert F. Whitelaw
Abstract

This paper investigates the relation between returns on stock indices and their corresponding futures contracts in order to evaluate potential explanations for the pervasive yet anomalous evidence of positive, short-horizon portfolio autocorrelations. Using a simple theoretical framework, we generate empirical implications for both microstructure and behavioral models. These implications are then tested using futures data on 24 contracts across 15 countries. The major findings are (I) return autocorrelations of indices tend to be positive even though their corresponding futures contracts have autocorrelations close to zero, (ii) these autocorrelation differences between spot and futures markets are maintained even under conditions favorable for spot-futures arbitrage, and (iii) these autocorrelation differences are most prevalent during low volume periods. These results point us towards a market microstructure-based explanation for short-horizon autocorrelations and away from explanations based on current popular behavioral models.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7214.

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Date of creation: Jul 1999
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Handle: RePEc:nbr:nberwo:7214

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G00 - Financial Economics - - General - - - General

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2002. "Dynamic Volume-Return Relation of Individual Stocks," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(4), pages 1005-1047.
    Other versions:
  2. Boudoukh, Jacob & Richardson, Matthew P & Whitelaw, Robert F, 1994. "A Tale of Three Schools: Insights on Autocorrelations of Short-Horizon Stock Returns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(3), pages 539-73. [Downloadable!] (restricted)
  3. Lo, Andrew W. & Craig MacKinlay, A., 1990. "An econometric analysis of nonsynchronous trading," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 181-211. [Downloadable!] (restricted)
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  4. Mech, Timothy S., 1993. "Portfolio return autocorrelation," Journal of Financial Economics, Elsevier, vol. 34(3), pages 307-344, December. [Downloadable!] (restricted)
  5. A. Craig MacKinlay, Krishna Ramaswamy, 1988. "Index-Futures Arbitrage and the Behavior of Stock Index Futures Prices," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(2), pages 137-158. [Downloadable!] (restricted)
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  8. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(1), pages 123-52. [Downloadable!] (restricted)
  9. Conrad, Jennifer & Kaul, Gautam, 1989. "Mean Reversion in Short-Horizon Expected Returns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 2(2), pages 225-40. [Downloadable!] (restricted)
  10. Tobias J. Moskowitz & Mark Grinblatt, . "Do Industries Explain Momentum?," CRSP working papers 480, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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  11. Foster, F Douglas & Viswanathan, S, 1993. "The Effect of Public Information and Competition on Trading Volume and Price Volatility," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(1), pages 23-56. [Downloadable!] (restricted)
  12. Brennan, Michael J & Jegadeesh, Narasimhan & Swaminathan, Bhaskaran, 1993. "Investment Analysis and the Adjustment of Stock Prices to Common Information," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(4), pages 799-824. [Downloadable!] (restricted)
  13. Hawawini, Gabriel A., 1980. "Intertemporal Cross-Dependence in Securities Daily Returns and the Short-Run Intervaling Effect on Systematic Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(01), pages 139-149, March. [Downloadable!]
  14. KENT D. DANIEL & David Hirshleifer & AVANIDHAR SUBRAHMANYAM, 2004. "A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions," Finance 0412006, EconWPA. [Downloadable!]
  15. Bessembinder, Hendrik & Hertzel, Michael G, 1993. "Return Autocorrelations around Nontrading Days," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(1), pages 155-89. [Downloadable!] (restricted)
  16. Holden, Craig W & Subrahmanyam, Avanidhar, 1992. " Long-Lived Private Information and Imperfect Competition," Journal of Finance, American Finance Association, vol. 47(1), pages 247-70, March. [Downloadable!] (restricted)
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  1. Craig Holden & Avanidhar Subrahmanyam, 1998. "New Events, Information Acquisition, and Serial Correlation," University of California at Los Angeles, Anderson Graduate School of Management 1115, Anderson Graduate School of Management, UCLA. [Downloadable!]
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