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

We investigate the relation between returns on stock indicesand their corresponding futures contracts to evaluate potentialexplanations for the pervasive yet anomalous evidence of positive,short-horizon portfolio autocorrelations. Using a simple theoreticalframework, we generate empirical implications for both microstructureand partial adjustment models. The major findings are (i) returnautocorrelations of indices are generally positive even thoughfutures contracts have autocorrelations close to zero, and (ii)these autocorrelation differences are maintained under conditionsfavorable for spot-futures arbitrage and are most prevalentduring low-volume periods. These results point toward microstructure-basedexplanations and away from explanations based on behavioralmodels.