Testing lead–lag relations between portfolio returns under price-limits

Abstract

A methodology is proposed to test the lead–lag relation between portfolio returns under price-limit restriction. The price-limit restriction is an important microstructure of the Taiwan stock market. Prior research on US stock return found that the lagged return of large-cap portfolios are correlated with the current return of small-cap portfolios. The results provide no evidence to indicate that the price adjustments of small capitalization portfolios are slower than that of large capitalization portfolios. Further, there is no evidence to imply a positive leading role of large capitalization portfolio returns over small capitalization portfolio returns.

Acknowledgement

The authors would like to thank Rashmi Prasad for comments and suggestions.

Notes

¹ Kim and Pitman (2000) found that volatile stocks, actively traded stocks, and small size stocks hit price limits more often than other stocks. After examining the price-limit system in the Taiwan Stock market, Shen and Wang (1998) reported that price limits have a positive effect on the daily autocorrelation of stock returns.