Speed of Adjustment and Infraday/Intraday Volatility in the Italian Stock and Futures Markets

Pietro Gottardo

doi:10.4236/me.2011.25082

Abstract

We estimate the speed of adjustment of prices to value changes in the Italian stock and futures markets using variances in different return intervals. The paper presents evidence that an assumption of linearity for the relationship volatility-time is untenable when intraday and infraday data are used jointly. Prices adjust to new information within three days, but the process is complex with evidence of overshooting and divergent movements in the smaller return intervals. Firms behave differently according to their inclusion or exclusion from the MIB30 index. The speed of adjustment is strongly related to firm-specific characteristics and the log of capitalization explains some of the cross-sectional variability in the adjustment coefficients for most of the return intervals.

Highlights

The growing body of evidence on stock returns predictability and overreaction challenges the traditional efficiency view that stock prices reflect fully and quickly all the relevant information
Prices adjust to new information within three days, but the process is complex with evidence of overshooting and divergent movements in the smaller return intervals
The sample includes the index of the 30 most important Italian stocks (MIB30), the futures contract on this index (FIB30), all the firms included in the MIB30 as well as the biggest firms not included in this index

Summary

Introduction

The growing body of evidence on stock returns predictability and overreaction challenges the traditional efficiency view that stock prices reflect fully and quickly all the relevant information. Daniel-Hirshleifer and Subrahmanyam [1] suggest a psychological model based on imperfect rationality, in particular they construct their model on two well-known psychological biases: investor overconfidence about the precision of his private information, and biased self-attribution which causes individuals to strongly attribute events that confirm the validity of their actions to high ability and events that disconfirm the action to external noise or sabotage. Another stream of literature suggests instead a lagged adjustment of security prices to new information.

Price-Adjustment Model

Data Sample and Methodological Choices

Adjustment Coefficients Estimates

Results on Speed of Adjustment and Firm Characteristics

Conclusions