Imperfect Information and Cross‐Autocorrelation among Stock Prices

KALOK CHAN

doi:10.1111/j.1540-6261.1993.tb04752.x

Imperfect Information and Cross‐Autocorrelation among Stock Prices

KALOK CHAN^*

^*Corresponding author for this work

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

88 Citations (Scopus)

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. 1993 The American Finance Association

Original language	English
Pages (from-to)	1211-1230
Journal	The Journal of Finance
Volume	48
Issue number	4
DOIs	https://doi.org/10.1111/j.1540-6261.1993.tb04752.x
Publication status	Published - Sept 1993
Externally published	Yes

Bibliographical note

Publication details (e.g. title, author(s), publication statuses and dates) are captured on an “AS IS” and “AS AVAILABLE” basis at the time of record harvesting from the data source. Suggestions for further amendments or supplementary information can be sent to [email protected].

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AB - 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. 1993 The American Finance Association

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Imperfect Information and Cross‐Autocorrelation among Stock Prices

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