SSE/EFI Working Paper Series in Economics and Finance
No 191:
Trading Volume and Autocorrelation: Empirical Evidence from the Stockholm Stock Exchange
Patrik Säfvenblad ()
Abstract: This paper provides an extensive empirical investigation
into the sources of index return autocorrelation, focusing on the relation
between autocorrelation in individual stock returns and autocorrelation in
index returns. The study uses daily data from the Stockholm Stock Exchange
over the period 1980-1995 and reports three main empirical findings. Daily
Swedish stock index returns exhibit strong, and consistently positive,
first order autocorrelation throughout the sample period. Positive
autocorrelation is observed for return frequencies between 1 day and 3
months. The most liquid stocks exhibit strong positive return
autocorrelation. Less liquid stocks exhibit weak or negative return
autocorrelation. Autocorrelation is asymmetric, high after days of above
average performance of the stock market, low after days of below average
performance. When compared to the other days of the week, both index
returns and individual stock returns exhibit the strongest autocorrelation
following on Friday returns. The transaction cost hypothesis was tested
using the Swedish stock market transaction tax. Results indicate lower
precision of stock prices during the transaction tax period, but no direct
effect on return autocorrelation. The paper concludes that at least three
sources contribute to observed return autocorrelation. For daily and
short-term returns, profit taking and nonsynchronous trading are the
probable causes of observed autocorrelation. For monthly and longer term
returns, time-varying expected returns best describe the empirical
results.
Keywords: Return autocorrelation; Stockholm Stock Exchange; trading volume; non-synchronous trading; feedback trading; time-varying risk premia; (follow links to similar papers)
JEL-Codes: G14; (follow links to similar papers)
26 pages, September 23, 1997
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