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Causes of cross-autocorrelation in security returns: Transaction costs versus information quality

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Abstract

We examine empirically the role of transaction costs and information quality as causes of cross-autocorrelations in security returns. Nonsynchronous trading influences are addressed by forming weekly returns based on averages of closing inside bid and ask quotations for NMS securities. Stock return volatility scaled by the bid-ask spread is employed as a proxy for transaction costs and trading volume is used as a measure of information quality. We find evidence that both transaction costs and information quality may contribute to cross-autocorrelations, but that information quality dominates transaction costs in explaining cross-autocorrelations after controlling for autocorrelation influences.

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Authors and Affiliations

  1. Department of Finance and Economics, Georgia Southern University, 30458, Statesboro, Georgia

    Terry L. Richardson

  2. Department of Finance, Florida State University, Florida, USA

    David R. Peterson

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  1. Terry L. Richardson
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  2. David R. Peterson
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Richardson, T.L., Peterson, D.R. Causes of cross-autocorrelation in security returns: Transaction costs versus information quality. J Econ Finance 21, 29–39 (1997). https://doi.org/10.1007/BF02929036

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