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Changing Expected Returns Can Induce Spurious Serial Correlation

Pukthuanthong, Kuntara and Roll, Richard and Subrahmanyam, Avanidhar (2019) Changing Expected Returns Can Induce Spurious Serial Correlation. Social Science Working Paper, 1446. California Institute of Technology , Pasadena, CA. (Unpublished)

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Changing expected returns can induce spurious autocorrelation in returns. We show why this happens with simple examples and investigate its prevalence in actual equity data. In a key contribution, we use ex ante expected return estimates from options prices, factor models, and analysts' price targets to investigate our premise. Absolute shifts in expected returns are indeed strongly and positively related to autocorrelations in the cross-section of individual stocks, as predicted by our analysis. Well-studied risk factors show no evidence of spurious components. We also show how our analysis implies spurious cross-autocorrelation and find supporting evidence for this phenomenon as well.

Item Type:Report or Paper (Working Paper)
Group:Social Science Working Papers
Subject Keywords:Efficient Markets, Serial Correlation, Spurious Results
Series Name:Social Science Working Paper
Issue or Number:1446
Record Number:CaltechAUTHORS:20191018-115420925
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:99368
Deposited By: Katherine Johnson
Deposited On:18 Oct 2019 18:58
Last Modified:26 Oct 2021 17:12

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