The Microstructure of Cross-Autocorrelations - FEDERAL RESERVE BANK of NEW YORK

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The Microstructure of Cross-Autocorrelations

September 2007 Number 303

JEL classification: G10, G14

Authors: Tarun Chordia, Asani Sarkar, and Avanidhar Subrahmanyam

This paper examines the mechanism through which the incorporation of information into prices leads to cross-autocorrelations in stock returns. The lead-lag relation between large and small stocks increases with lagged spreads of large stocks. Further, order flows in large stocks significantly predict the returns of small stocks when large stock spreads are high. This effect is consistent with the notion that trading on common information takes place first in the large stocks and is then transmitted to smaller stocks with a lag, suggesting that price discovery takes place in the large stocks.

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43 pages / 428 kb

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