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Autocorrelation and partial price adjustment

Author

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  • Anderson, Robert M.
  • Eom, Kyong Shik
  • Hahn, Sang Buhm
  • Park, Jong-Ho

Abstract

Stock return autocorrelation contains spurious components—the nonsynchronous trading effect (NT) and bid–ask bounce (BAB)—and genuine components—partial price adjustment (PPA) and time-varying risk premia (TVRP). We identify a portion that can unambiguously be attributed to PPA, using three key ideas: theoretically signing and/or bounding the components; computing returns over disjoint subperiods separated by a trade to eliminate NT and greatly reduce BAB; and dividing the data period into disjoint subperiods to obtain independence for statistical power. Analyzing daily individual and portfolio return autocorrelations in sixteen years of NYSE intraday transaction data, we find compelling evidence that PPA is a major source of the autocorrelation.

Suggested Citation

  • Anderson, Robert M. & Eom, Kyong Shik & Hahn, Sang Buhm & Park, Jong-Ho, 2013. "Autocorrelation and partial price adjustment," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 78-93.
    • Handle: RePEc:eee:empfin:v:24:y:2013:i:c:p:78-93
    DOI: 10.1016/j.jempfin.2013.08.003
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    4. Rahman, Md. Lutfur & Lee, Doowon & Shamsuddin, Abul, 2017. "Time-varying return predictability in South Asian equity markets," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 179-200.
    5. Wen-Jun Xue & Li-Wen Zhang, 2016. "Stock Return Autocorrelations and Predictability in the Chinese Stock Market: Evidence from Threshold Quantile Autoregressive Models," Working Papers 1605, Florida International University, Department of Economics.
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    8. Maderitsch, R., 2015. "Information transmission between stock markets in Hong Kong, Europe and the US: New evidence on time- and state-dependence," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 13-36.
    9. Zhang, Chris H. & Frijns, Bart, 2019. "Noise trading and informational efficiency," EconStor Preprints 198037, ZBW - Leibniz Information Centre for Economics.
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    More about this item

    Keywords

    Stock return autocorrelation; Nonsynchronous trading; Partial price adjustment; Market; Microstructure; Open-to-close return;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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