S-WoPEc
 
Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 189:
Lead-Lag Effects When Prices Reveal Cross-Security Information

Patrik Säfvenblad ()

Abstract: This paper introduces and analyses a model of cross-security information aggregation in a rational expectations equilibrium (REE). The model predicts a well-defined lead-lag structure between securities returns as a result of Bayesian information extraction from realised securities prices. Both leads and lags will be strongest between securities with highly correlated return processes, but only weakly correlated return innovations. Securities whose prices reveal highly precise signals will tend to lead other securities. The model has important implications for empirical testing of lead-lag effects between financial markets and instruments. As an application of the model, it is demonstrated that stock option returns will tend to lag the corresponding stock prices. Direct empirical tests of the lead-lag effects between individual stocks on the Paris Bourse provided strong support for the model. In addition to confirming the predicted pattern of leads and lags, the paper demonstrates that the cross-security correlation is higher for short-term returns than for long-term returns for about a third of securities pairs traded on the Paris Bourse. This result is interpreted as strong cross-security correlation of revealed information, which gives the model strong support over alternative specifications of multi-asset securities markets, such as the nonsynchronous trading hypothesis or the Chan (1993) model.

Keywords: multi-asset securities market; information aggregation; auction markets; cross-autocorrelation; Paris Bourse; rational expectations equilibrium (REE); (follow links to similar papers)

JEL-Codes: G14; (follow links to similar papers)

27 pages, September 1, 1997

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

hastef0189.pdf.zip    PDF-file (zipped) (553kB) 
hastef0189.pdf    PDF-file (609kB) 
hastef0189.ps.zip    PKZipped PostScript (259kB) 
hastef0189.ps    PostScript file (714kB) 
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:hastef:0189 This page was generated on 2014-12-14 19:22:53