NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

New Trading Practices and Short-run Market Efficiency

Kenneth A. Froot, Andre F. Perold

NBER Working Paper No. 3498
Issued in November 1990
NBER Program(s):   ME

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.

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Document Object Identifier (DOI): 10.3386/w3498

Published: Revised in Journal of Futures Markets, vol 15, Oct 1995, pp 731-766.

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