Portfolio size, non-trading frequency and portfolio return autocorrelation

In this paper we re-examine the relationship between non-trading frequency and portfolio return autocorrelation. We show that in portfolios where security specific effects have not been completely diversified, portfolio autocorrelation will not increase monotonically with increasing non-trading, as indicated in Lo and MacKinlay (1990). We show that at high levels of non-trading, portfolio autocorrelation will become a decreasing function of non-trading probability and may take negative values. We find that heterogeneity among the means, variances and betas of the component securities in a portfolio can act to increase the induced autocorrelation, particularly in portfolios containing fewer stocks. Security specific effects remain even when the number of securities in the portfolio is far in excess of that considered necessary to diversify security risk. © 2014 Elsevier B.V.

Conditional volatility and firm size:an empirical analysis of UK equity portfolios

The techniques and insights from two distinct areas of financial economic modelling are combined to provide evidence of the influence of firm size on the volatility of stock portfolio returns. Portfolio returns are characterized by positive serial correlation induced by the varying levels of non-synchronous trading among the component stocks. This serial correlation is greatest for portfolios of small firms. The conditional volatility of stock returns has been shown to be well represented by the GARCH family of statistical processes. Using a GARCH model of the variance of capitalization-based portfolio returns, conditioned on the autocorrelation structure in the conditional mean, striking differences related to firm size are uncovered.