Size-sorted portfolios and information spillovers

Structural evidence from Australia

George Milunovich*

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

A structural model is proposed to analyze linkages between large, medium and small capitalization securities traded on the Australian Stock Exchange. Small stocks fail to react instantaneously to the information transmitted by large and medium cap firms, and take several weeks to absorb this information in an entirely lagged adjustment process. In contrast, medium firms respond to the information conveyed by large cap securities with about 80 percent instantaneous and 20 percent lagged adjustment. Large stocks are the quickest to respond to new information but slightly overshoot in their immediate reaction to the news transmitted by medium cap firms. A number of trading strategies are constructed on the basis of the uncovered patterns in order to test for the possibility of arbitrage profits. Although the excess returns generated by these strategies are typically positive, they are statistically insignificant, suggesting that the discovered signals are too weak to be successfully used for trading purposes.

Original languageEnglish
Pages (from-to)200-208
Number of pages9
JournalInvestment Management and Financial Innovations
Volume6
Issue number4
Publication statusPublished - 2009

Keywords

  • GARCH
  • Information spillovers
  • Predictability
  • Size-sorted portfolios
  • Structural model

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