Autocorrelation, Market Imperfections, and the CAPM

Abstract

There is strong theoretical support for the notion that prices in a perfect capital market will vary randomly ([22], [16]). However, the existence of some nonrandomness in stock prices is well documented, see ([10], [11], [13], [14], [20]). Of special importance for this study is the research by Young [24] who finds predominantly negative autocorrelation for a sample of securities using a monthly differencing interval. Autocorrelation coefficients are often used as a measure of nonrandom price behavior; negative autocorrelation is an indication of price reversals.