Working Paper: NBER ID: w7214
Authors: Donghyun Ahn; Jacob Boudoukh; Matthew Richardson; Robert F. Whitelaw
Abstract: This paper investigates the relation between returns on stock indices and their corresponding futures contracts in order to evaluate potential explanations for the pervasive yet anomalous evidence of positive, short-horizon portfolio autocorrelations. Using a simple theoretical framework, we generate empirical implications for both microstructure and behavioral models. These implications are then tested using futures data on 24 contracts across 15 countries. The major findings are (I) return autocorrelations of indices tend to be positive even though their corresponding futures contracts have autocorrelations close to zero, (ii) these autocorrelation differences between spot and futures markets are maintained even under conditions favorable for spot-futures arbitrage, and (iii) these autocorrelation differences are most prevalent during low volume periods. These results point us towards a market microstructure-based explanation for short-horizon autocorrelations and away from explanations based on current popular behavioral models.
Keywords: No keywords provided
JEL Codes: G00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market microstructure (D49) | Autocorrelation patterns in stock indices (C22) |
| Return autocorrelations of indices (C22) | Autocorrelation patterns in stock indices (C22) |
| Futures contracts exhibit autocorrelations close to zero (G13) | Autocorrelation patterns in futures contracts (C22) |
| Observed autocorrelation differences persist during favorable conditions for spot-futures arbitrage (C22) | Autocorrelation differences between stock indices and futures contracts (C22) |
| Market liquidity (G19) | Autocorrelation dynamics (C69) |
| Absence of significant transaction costs (D41) | Causal claims regarding differences in autocorrelation between spot and futures markets (C22) |