Non-linear dependence in stock returns: does trading frequency matter?

Pradeep K. Yadav, Krishna Paudyal, Peter F. Pope

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

The UK has a quote‐driven pure dealer market structure that is very different from order driven markets such as the NYSE and Japanese markets. This paper investigates non‐linear dependence in stock returns for an exhaustive sample of UK stocks for a 21 year period. The results are analysed on the basis of trading frequency. It is found that non‐linear dependence is highly significant in all cases for both individual stocks and stock portfolios formed on the basis of trading frequency. The non‐linear dependence is primarily over a one day interval, although statistically significant non‐linear dependence exists consistently even up to five trading days. Most of the non‐linear dependence is in the form of ARCH‐type conditional heteroskedasticity. However, statistically significant non‐linearity in addition to an EGARCH(1,1) dependence also appears to be present. This additional non‐linearity is greater for individual stocks than for portfolios and greater for smaller, less‐liquid portfolios. Non‐linear dependence does not appear to be caused by non‐stationarity in underlying economic fundamentals or by non‐linearity in the conditional mean. However, low dimensional chaos is not generally supported. The limited evidence on chaotic behaviour is stronger for portfolios with long price adjustment delays across component stocks. The main results are consistent with US studies on stock indices, suggesting that the process generating non‐linear dependence is not dependent on market microstructure characteristics.
LanguageEnglish
Pages651-679
Number of pages29
JournalJournal of Business Finance and Accounting
Volume26
Issue number5-6
DOIs
Publication statusPublished - 31 Jul 1999

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Stock returns
Nonlinear dependence
Nonlinearity
New York Stock Exchange
Autoregressive conditional heteroscedasticity
Chaos
Economic fundamentals
Nonstationarity
Dealer markets
Conditional heteroskedasticity
Market structure
Price adjustment
Market microstructure
Stock index
Order-driven markets

Keywords

  • non-linear dependence
  • stock returns
  • trading frequency

Cite this

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Non-linear dependence in stock returns : does trading frequency matter? / Yadav, Pradeep K.; Paudyal, Krishna; Pope, Peter F.

In: Journal of Business Finance and Accounting, Vol. 26, No. 5-6, 31.07.1999, p. 651-679.

Research output: Contribution to journalArticle

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