Stock return cross-autocorrelations and market conditions in Japan

Abstract

We show that changes in market conditions significantly affect cross-autocorrelations and speed of adjustment in weekly stock returns. We find significant positive crossautocorrelations between weekly returns on a portfolio of small firms and lagged large-firm portfolio returns only when the lagged aggregate market has experienced a decline in value. These positive-return cross-autocorrelations are also associated with lower abnormal portfolio trading volume and greater delays in the adjustment of individual stock prices to (negative) market-wide information, particularly for small firms. The effect of lagged market states cannot be explained by market microstructure biases such as nonsynchronous trading or thin trading. © 2006 by The University of Chicago. All rights reserved.