AUTOCORRELATION IN MARKET MODEL RESIDUALS |
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| Authors: | Ronald E. Copley Philip L. Cooley Rodney L. Roenfeldt |
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| Affiliation: | Ronald E. Copley is from the Fogelman College of Business and Economics, Memphis State University. Philip L. Cooley and Rodney L. Roenfeldt are from the College of Business Administration, University of South Carolina. They wish to thank Robert J. Sweeney for his extensive computer programming. |
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| Abstract: | Autocorrelation in market model residuals affects the estimate of market risk measured by beta. Correction for autocorrelation can substantially change the estimate of beta for some common stocks. In view of the importance of beta estimates in financial research and investment practice, an examination is undertaken in this paper of the prevalence of autocorrelation and two of its causes. The evidence indicates that negative autocorrelation affects estimates of beta for a large number of stocks. In addition, negative autocorrelation is most prevalent among thinly traded and low-priced stocks. |
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