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Stock Return Autocorrelation is Not Spurious

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

Abstract

We find compelling evidence that stock return autocorrelation is not spurious. Specifically, we find that partial price adjustment is an important source, and in some cases the main source, of the autocorrelation. In contrast to previous tests, our tests of partial price adjustment are direct, using disjoint time intervals, separated by a trade, to eliminate the nonsynchronous trading effect. We find compelling evidence of partial price adjustment in several settings, involving both individual stocks and portfolios. We also find evidence for partial price adjustment in an unlikely setting: the incorporation of very public, non-firm-specific information into the price of individual stocks. Several of our tests allow us to estimate lower bounds on the fraction of the autocorrelation that comes from partial price adjustment; in each case, we find the fraction is very substantial.

Suggested Citation

  • Anderson, Robert M. & Eom, Kyong Shik & Hahn, Sang Buhm & Park, Jong-Ho, 2005. "Stock Return Autocorrelation is Not Spurious," Department of Economics, Working Paper Series qt9s35b82c, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    • Handle: RePEc:cdl:econwp:qt9s35b82c
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    1. Dong-Hyun Ahn & Jacob Boudoukh & Matthew Richardson & Robert F. Whitelaw, 2002. "Partial Adjustment or Stale Prices? Implications from Stock Index and Futures Return Autocorrelations," The Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 655-689, March.
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    Cited by:

    1. Victor DeMiguel & Francisco J. Nogales & Raman Uppal, 2014. "Stock Return Serial Dependence and Out-of-Sample Portfolio Performance," The Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 1031-1073.

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