A closer look at co-movements among stock returns |
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Authors: | Allan A. Zebedee Maria Kasch-Haroutounian |
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Affiliation: | 1. Department of Economics and Financial Studies, College of Business, Clarkson University, PO Box 5790, Potsdam, NY 13699-5790, United States;2. Department of Economics, BWL I, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany |
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Abstract: | Correlation among financial assets is widely recognized; however, the mechanics of the relationship are not well understood. This paper investigates the microstructure of the co-movement of stock returns. The goal is to improve our understanding of correlation among stock returns by examining the conditions under which asset returns co-move on an intra-day basis. The methodology combines a traditional lead–lag model with a modified or pseudo-error correction model. Empirical evidence is presented to suggest the speed of adjustment between paired asset intra-day returns is a function of asymmetric information. Specifically, the wider an asset's spread, the faster the asset will converge to the intra-day returns of other similar assets. This result is consistent with partial adjustment model presented by Chan (Chan, K. (1993). Imperfect information and cross-autocorrelation among stock prices. The Journal of Finance:1211–1230.) which suggests market makers gain from monitoring other market makers in periods of uncertainty. |
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