Speed of Adjustment and Infraday/Intraday Volatility in the Italian Stock and Futures Markets
- 1
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.
- K. Daniel, D. Hirshleifer and A. Subrahmanyam, “Investor Psychology and Security Market Under- and Overreactions,” Journal of Finance, Vol. 53, No. 6, 1998, pp. 1839-1885. doi:10.1111/0022-1082.00077
- E. F. Fama, “Market Efficiency, Long Term Returns and Behavioral Finance,” Journal of Financial Economics, Vol. 49, No. 3, 1998, pp. 283-306. doi:10.1016/S0304-405X(98)00026-9
- J. M. Patell and M. A. Wolfson, “The Intraday Speed of Price Adjustment of Stock Prices to Earnings and Dividend Announcements,” Journal of Financial Economics, Vol. 13, No. 2, 1984, pp. 223-252. doi:10.1016/0304-405X(84)90024-2
- J. Hasbrouck and T. Ho, “Order Arrival, Quote Behavior and the Return-Generating Process,” Journal of Finance, Vol. 42, No. 4, 1987, pp. 1035-1049. doi:10.2307/2328305
- K. Garbade and W. Silber, “Structural Organization of Secondary Markets: Clearing Frequency, Dealer Activity and Liquidity Risk,” Journal of Finance, Vol. 34, No. 3, 1979, pp. 577-593. doi:10.2307/2327427
- K. Garbade and W. Silber, “Price Movement and Price Discovery in Futures and Cash Markets,” Review of Economics and Statistics, Vol. 65, No. 2, 1983, pp. 289- 297. doi:10.2307/1924495
- B. Goldman and A. Beja, “Market Prices vs. Equilibrium Prices: Return’s Variance, Serial Correlation, and the Role of the Specialist,” Journal of Finance, Vol. 34, No. 3, 1979, pp. 595-607. doi:10.2307/2327428
- Y. Amihud, and H. Mendelson, “Index and Index-Futures Returns,” Journal of Accounting, Auditing & Finance, Vol. 4, No. 2, 1989, pp. 415-431.
- A. Damodaran, “A Simple Measure of Price Adjustment Coefficients,” Journal of Finance, Vol. 48, No. 1, 1993, pp. 387-400. doi:10.2307/2328896
- N. Brisley and M. Theobald, “A Simple Measure of Price Adjustment Coefficients: A Correction,” Journal of Finance, Vol. 51, No. 1, 1996, pp. 381-382. doi:10.2307/2329314
- W. F. M. DeBondt and R. H. Thaler, “Does the Stock Market Overreact?” Journal of Finance, Vol. 40, No. 3, 1985, pp. 793-808. doi:10.2307/2327804
- Y. Amihud and H. Mendelson, “Trading Mechanisms and Stock Returns: An Empirical Investigation,” Journal of Finance, Vol. 42, No. 3, 1987, pp. 533-553. doi:10.2307/2328369
- Y. Amihud, H. Mendelson and M. Murgia, “Stock Market Microstructure and Return Volatility: Evidence from Italy,” Journal of Banking and Finance, Vol. 14, No. 2-3, 1990, pp. 423-440. doi:10.1016/0378-4266(90)90057-9