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Information Spillovers and Size-sorted Portfolios: Structural Evidence from Australia

Author

Listed:
  • George Milunovich

    (Department of Economics, Macquarie University)

Abstract

A portfolio of small capitalization stocks formed from securities listed on the Australian Stock Exchange (ASX) fails to adjust to market-wide news instantaneously and displays a significant amount of predictability from lagged returns on large and medium size firms. Despite apparently large excess payoffs generated by filter rules, the lagged adjustments become economically insignificant once transaction costs associated with taking a position in each constituent security are taken into account. I suggest that the observed predictability is largely due to a lack of small cap portfolio derivatives which could facilitate index arbitrage and enhance price discovery in the Australian market.

Suggested Citation

  • George Milunovich, 2006. "Information Spillovers and Size-sorted Portfolios: Structural Evidence from Australia," Research Papers 0610, Macquarie University, Department of Economics.
    • Handle: RePEc:mac:wpaper:0610
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    File URL: http://www.econ.mq.edu.au/research/2006/10_2006_Milunovich.pdf
    File Function: First Version, 2006
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    More about this item

    Keywords

    size-sorted portfolios; ASX; structural GARCH; predictability;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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