Cross-Autocorrelation between Small and Large Cap Portfolios in the German and Turkish Stock Markets

Abstract

This paper studies the cross-autocorrelation structure in the German and Turkish stock markets by using daily portfolio returns. We find the evidence that large cap portfolios lead small cap portfolios in both subperiods of German stock market but this structure is seen only in the first subperiod of Turkish stock market. Analysing the market-wide and portfolio-specific information effects on portfolio returns shows that above stated lead-lag relation is associated with the market-wide information content in lagged large cap portfolio returns. We also document a directional asymmetry in small (large) cap portfolio returns’ reactions to lagged large (small) cap portfolio returns. The evidence is contradicting to the previous findings of McQueen, Pinegar and Thorley (1996) and Marshall and Walker (2002) whoose researches are conducted on US and Chile stock markets. Our findings show the lagged effects of bad news - not good news - on small cap portfolio returns. It is documented that the speed of adjustment of small cap portfolio prices to common market-wide information is slower than large cap portfolio prices and small cap portfolio prices are slower in reacting to bad news.German stock market ; Turkish stock market ; Cross- autocorrelation ; Market-wide and portfolio-specific information ; Asymmetric reaction