2003 Reports

Stock index autocorrelation and cross-autocorrelations of the size-sorted portfolios in the Japanese market

Iwaisako, Tokuo

Following Lo and MacKinlay's works on the U.S. market (1988, 1990), this paper studies the autocorrelation of the market index and the cross-autocorrelations of the size-sorted portfolios in the Japanese market. The structure of the crossautocorrelations in the Japanese market is found to be very similar to that of the U.S. in the sense that there exists lead-lag relations running from larger stocks to smaller stocks and they will create positive autocorrelation in the market index. Although we find no autocorrelation in the popular Japanese market index such as TOPIX, it is because TOPIX puts much more weight on larger stocks compared with CRSP index for the U.S. market. However, recently such a structure of the Japanese market has become unstable and I argue the fact that it is the largest stocks which began to show negative autocorrelation since the second half of the 1990s that will explain it.