Stock Index Autocorrelation and Cross-autocorrelations of Size-sorted Portfolios in the Japanese Market

Abstract

Following Lo and MacKinlay's work on the U.S. market (1988, 1990), this paper investigates the autocorrelation of the market index and the cross-autocorrelations of size-sorted portfolios in the Japanese market. The structure of the cross-autocorrelations in the Japanese market is very similar to that of the U.S. in the sense that there are lead-lag relations running from larger stocks to smaller stocks, which will create positive autocorrelation in the market index. Although we have found no autocorrelation in the popular Japanese TOPIX market index, it is because TOPIX puts much more weight on larger stocks compared to the CRSP index for the U.S. market. However, such a cross-autocorrelation structure disappeared during the latter half of the 1990s, as the largest stocks in the Japanese market began to exhibit negative autocorrelation. The possibility of a serious financial crisis during this period provides an explanation for negative autocorrelation. Some empirical evidence is provided for this explanation.