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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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  • Kenneth A. Froot & Andre F. Perold, 1990. "New Trading Practices and Short-run Market Efficiency," NBER Working Papers 3498, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3498
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    1. Fernando F. Ferreira & A. Christian Silva & Ju-Yi Yen, 2019. "Detailed study of a moving average trading rule," Papers 1907.00212, arXiv.org.
    2. Kenneth A. Froot & Andre F. Perold & Jeremy C. Stein, 1992. "Shareholder Trading Practices And Corporate Investment Horizons," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(2), pages 42-58, June.
    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. Qian Han & Jufang Liang, 2017. "Index Futures Trading Restrictions and Spot Market Quality: Evidence from the Recent Chinese Stock Market Crash," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(4), pages 411-428, April.
    5. Ms. Thornton Matheson, 2011. "Taxing Financial Transactions: Issues and Evidence," IMF Working Papers 2011/054, International Monetary Fund.
    6. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2022. "Idiosyncratic Equity Risk Two Decades Later," NBER Working Papers 29916, National Bureau of Economic Research, Inc.
    7. Pischke, Jorn-Steffen, 1995. "Individual Income, Incomplete Information, and Aggregate Consumption," Econometrica, Econometric Society, vol. 63(4), pages 805-840, July.
    8. Linda L. Tesar & Rene M. Stulz & Stephen Friedman & George N. Hatsopoulos, 1999. "The Role of Equity Markets in International Capital Flows," NBER Chapters, in: International Capital Flows, pages 235-306, National Bureau of Economic Research, Inc.
    9. Sias, Richard W. & Starks, Laura T., 1997. "Return autocorrelation and institutional investors," Journal of Financial Economics, Elsevier, vol. 46(1), pages 103-131, October.
    10. Sinha, Pankaj & Mathur, Kritika, 2015. "Impact of Commodities Transaction Tax on Indian Commodity Futures," MPRA Paper 63677, University Library of Munich, Germany.
    11. Hans R. Stoll & Robert E. Whaley, 1997. "Expiration†Day Effects of the All Ordinaries Share Price Index Futures: Empirical Evidence and Alternative Settlement Procedures," Australian Journal of Management, Australian School of Business, vol. 22(2), pages 139-174, December.
    12. Navaz Naghavi & Wee-Yeap Lau, 2014. "Exploring the nexus between financial openness and informational efficiency -- does the quality of institution matter?," Applied Economics, Taylor & Francis Journals, vol. 46(7), pages 674-685, March.
    13. Strobel, Marcus & Auer, Benjamin R., 2018. "Does the predictive power of variable moving average rules vanish over time and can we explain such tendencies?," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 168-184.
    14. Zhang, Chuanhai & Chen, Haicui & Peng, Zhe, 2022. "Does Bitcoin futures trading reduce the normal and jump volatility in the spot market? Evidence from GARCH-jump models," Finance Research Letters, Elsevier, vol. 47(PB).
    15. Pascal Alphonse, 2007. "Mispricing Persistence and the Effectiveness of Arbitrage Trading," Multinational Finance Journal, Multinational Finance Journal, vol. 11(1-2), pages 123-156, March-Jun.

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