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1、Serialcorrelationinhigh-frequencydataandthelinkwithliquiditySusanThomasTirthankarPatnaikDecember12,2002AbstractThispapertestsformarketef?ciencyathigh-frequenciesoftheIndianequitymarkets.Wedothisbytestingthebehaviourofserialcorrelationin?rmstockpricesusingtheVarianceRatiotestonhighfre
2、quencyreturnsdata.We?ndthatatafrequencyintervalof?veminutes,allthestocksshowapatternofmean-reversion.However,differentstocksrevertatdifferentrates.We?ndthatthereisacorrelationbetweenthetimethestocktakestoreverttothemeanandtheliquidityofthestockonthemarket.Here,liquidityismeasuredboth
3、intermsofimpactcostaswellastradingintensity.Keywords:Variance-Ratios,HighFrequencyData,MarketLiquidityContents1Introduction32Issues52.1Choiceoffrequencyforthepricedata........................62.2Concatenationofpricesacrossdifferentdays....................62.3Intra-dayheteroskedastici
4、tyinreturns........................72.4Measuringintra-dayliquidity.............................73Econometricstrategies83.1TheVarianceRatiomethodology...........................813.2VarianceRatioswithHFdata.............................103.3Issuesofinference............................
5、......104Datadescription115Results135.1SerialcorrelationintheMarketIndex........................135.2Serialcorrelationsinindividualstocks........................166Conclusion2121IntroductionTheearliesttestsofthe“Ef?cientMarketHypothesis”(EMH)havefocussedonserialcorrelationin?nancialm
6、arketdata.Thepresenceofsigni?cantserialcorrelationindicatesthatpricescouldbeforecasted.This,inturn,impliesthattheremightbeopportunitiesforrationalagentstoearnabnormalpro?tsiftheforecastswerepredictableafteraccountingfortransactionscosts.UnderthenulloftheEMHthough,serialcorrelationsou
7、ghttobeneglible.Mostoftheempiricalliteratureonmarketef?ciencydocumentsthatserialcorrelationsindailyreturnsdataareverysmall,whichsupportsthehypothesisofmarketef?ciency.However,mostofthesetestsarevulnerabletoproblemsoflowpower.Therearepapersthatpointoutthattestsofserialcorrelationarevu
8、lnerabletolo
