Partial Adjustment or Stale Prices? Implications from Stock Index and Futures Return Autocorrelations

Authors: Ahn D-H.¹; Boudoukh J.²; Richardson M.³; Whitelaw R.F.³

Source: Review of Financial Studies, Volume 15, Special Issue 2, 2002 , pp. 655-689(35)

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Abstract:

We investigate the relation between returns on stock indices and their corresponding futures contracts to evaluate potential explanations for the pervasive yet anomalous evidence of positive, short-horizon portfolio autocorrelations. Using a simple theoretical framework, we generate empirical implications for both microstructure and partial adjustment models. The major findings are (i) return autocorrelations of indices are generally positive even though futures contracts have autocorrelations close to zero, and (ii) these autocorrelation differences are maintained under conditions favorable for spot-futures arbitrage and are most prevalent during low-volume periods. These results point toward microstructure-based explanations and away from explanations based on behavioral models.

Document Type: Original article

Affiliations: 1: University of North Carolina, Chapel Hill 2: New York University, IDC, and NBER 3: New York University and NBER

Publication date: 2002-01-01

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The Review of Financial Studies is a major forum for the promotion and wide dissemination of significant new research in financial economics. As reflected by its broadly based editorial board, the Review balances theoretical and empirical contributions. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Finance is interpreted broadly to include the interface between finance and economics. The Review is sponsored by The Society for Financial Studies. The editors of the Review and officers of the Society are elected for limited terms.