Time Varying Factors and Cross-Autocorrelations in Short Horizon Stock Returns
J. OF FINANCIAL RESEARCH
Posted: 17 Mar 1997
In this paper I show that the lead-lag pattern between large and small market value portfolio returns is consistent with differential variations in their expected return components. I find that the larger predictability of returns on the portfolio of small stocks may be due to a higher exposure of these firms to persistent (time-varying) latent factors. Additional evidence suggest that the asymmetric predictability cannot be fully explained by lagged price adjustments to common factor shocks: (i) lagged returns on large stocks do not have strong causal effect on returns on small stocks; (ii) trading volume is positively related to own and cross-autocorrelations in weekly portfolio returns; and (iii) significant cross- autocorrelation exists between current returns on large stocks and lagged returns on small stocks when trading volume is high.
JEL Classification: G11
Suggested Citation: Suggested Citation