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Does prior stock return correlation predict future stock return correlation?

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  • Jonathan Ross

    (Western Kentucky University)

Abstract

Using the sample time period 1950–2020, the historical average stock return correlation of a portfolio of firms is a strong positive predictor of that same portfolio’s future average stock return correlation. The prediction improves when more prior monthly returns are used. The prediction holds after controlling for macroeconomic factors. The prediction also is much better for portfolios comprised of small firms relative to large firms. The prediction holds not only for the CRSP market of firms, but also for various-sized randomly chosen sub-samples of that market.

Suggested Citation

  • Jonathan Ross, 2023. "Does prior stock return correlation predict future stock return correlation?," SN Business & Economics, Springer, vol. 3(9), pages 1-15, September.
    • Handle: RePEc:spr:snbeco:v:3:y:2023:i:9:d:10.1007_s43546-023-00551-z
    DOI: 10.1007/s43546-023-00551-z
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    References listed on IDEAS

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    More about this item

    Keywords

    Stock return correlation; Predicting future returns; Return variances;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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