Premium
Imperfect Information and Cross‐Autocorrelation among Stock Prices
Author(s) -
CHAN KALOK
Publication year - 1993
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1993.tb04752.x
Subject(s) - autocorrelation , stock (firearms) , econometrics , economics , stock price , stock market , imperfect , financial economics , statistics , mathematics , geography , biology , paleontology , linguistics , context (archaeology) , philosophy , archaeology , series (stratigraphy)
ABSTRACT I develop a model to explain why stock returns are positively cross‐autocorrelated. When market makers observe noisy signals about the value of their stocks but cannot instantaneously condition prices on the signals of other stocks, which contain marketwide information, the pricing error of one stock is correlated with the other signals. As market makers adjust prices after observing true values or previous price changes of other stocks, stock returns become positively cross‐autocorrelated. If the signal quality differs among stocks, the cross‐autocorrelation pattern is asymmetric. I show that both own‐ and cross‐autocorrelations are higher when market movements are larger.