No. 987: Are Intraday Returns Autocorrelated?
Yufei Li ,
King's Business School, King's College London,
Liudas Giraitis ,
School of Economics and Finance, Queen Mary University of London
Genaro Sucarrat ,
BI Norwegian Business School
February 26, 2024
Abstract
The presence of autocorrelated nancial returns has major implications for investment decisions.
Unsurprisingly, therefore, numerous studies have sought to shed light on whether returns are
autocorrelated or not, to what extent, and when. Standard tests for autocorrelation rely on
the assumption of strict stationarity of returns, possibly after a suitable transformation. Recent
studies, however, reveal that intraday nancial returns are often characterised by a subtle form
of non-stationarity that cannot be transformed away, namely non-stationary periodicity in the
zero-process. Here, we propose tests for autocorrelation that are valid under this (and other
forms) of non-stationarity. The tests are simple to implement, and well-sized and powerful as
documented in our Monte Carlo simulations. Next, in a study of the intraday returns of stocks
and exchange rates, our robust tests document that returns are rarely autocorrelated. This is in
sharp contrast to the standard benchmark test, which spuriously detects a substantial number
of autocorrelations. Moreover, stability analyses with our robust tests suggest the signi cance
of the autocorrelations is short-lived and very erratic. So it is unclear whether the short-lived
autocorrelations can be used to inform decision-making.
J.E.L classification codes: C01, C12, C22
Keywords:robust correlation testing, zero-process, non-stationary periodicity