New Trading Practices and Short-Run Market Efficiency

48 Pages Posted: 9 Jul 2007 Last revised: 26 Jul 2010

See all articles by Kenneth Froot

Kenneth Froot

National Bureau of Economic Research (NBER); Harvard University - Business School (HBS)

André Perold

Harvard Business School - Finance Unit

Date Written: October 1990

Abstract

We document a large decrease in autocorrelation and increase in variance of recent short-run returns on several broad stock market indexes, over the 1983-89 period, 15-minute returns went from being highly positively serially correlated to practically uncorrelated. Over the past twenty years, daily and weekly autocorrelations have also fallen, we use transactions data to decompose short-run index autocorrelation into three components: bid-ask bounce, nontrading effects, and noncomtemporaneous cross-stock correlations in specialists' quotes. The first two factors do not explain the autocorrelation's decline. We argue that new trading practices have improved the processing of market-wide information, and that the recent decreases in autocorrelation and increases in volatility simply reflect these improvements.

Suggested Citation

Froot, Kenneth and Perold, André F., New Trading Practices and Short-Run Market Efficiency (October 1990). NBER Working Paper No. w3498, Available at SSRN: https://ssrn.com/abstract=467656

Kenneth Froot (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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United States

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

André F. Perold

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6680 (Phone)
617-496-6592 (Fax)

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