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Does the relationship between small and large portfolios’ returns confirm the lead–lag effect? Evidence from the Athens Stock Exchange

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  • Drakos, Anastassios A.

Abstract

This paper investigates whether lead–lag patterns exist between small and large size portfolios constructed from stocks traded in the Athens Stock Exchange (ASE). We examine this relationship in both the short-run (by using the correlation-based approach of Lo and MacKinlay, 1990 and the generalised impulse response analysis by Pesaran and Shin, 1996, 1998) and the long-run by employing the cointegration-based methodology of Kanas and Kouretas (2005). Furthermore, upon identifying that cointegration exists we then use the estimated error correction models (ECMs) to obtain out-of-sample forecasts of small-firm portfolio returns and it is shown that these ECMs have superior forecasting performance relative to models without the error correction terms. Therefore, we were able to provide a richer exploration of the lead–lag relationships than the one obtained by standard autocorrelation and cross-correlation analysis and vector autoregression analysis. The main finding of our analysis is that a lead–lag effect between small and large size portfolios was established in both the short-run and the long-run for the Athens equity market.

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  • Drakos, Anastassios A., 2016. "Does the relationship between small and large portfolios’ returns confirm the lead–lag effect? Evidence from the Athens Stock Exchange," Research in International Business and Finance, Elsevier, vol. 36(C), pages 546-561.
  • Handle: RePEc:eee:riibaf:v:36:y:2016:i:c:p:546-561
    DOI: 10.1016/j.ribaf.2015.05.002
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    More about this item

    Keywords

    Lead–lag effect; Cross correlation; Cointegration; Stock returns predictability; Size-sorted portfolios;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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