Abstract

In this paper, we show that changes in market conditions significantly affect cross-autocorrelations in short-horizon stock returns in Japan. We find strong (weak) cross-autocorrelations between returns on small firms and lagged returns on large firms following periods of aggregate market losses (gains). This asymmetric effect of lagged market state on cross-autocorrelations cannot be explained by market micro-structure biases such as non-synchronous trading and thin trading. Further analyses suggest that lack of aggregate trading activity following periods of market decline contribute to the delays in registering negative market-wide information in stock prices, particularly for small stocks.

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