Serial correlation in the returns of UK capitalization based portfolios

P. Chelley-Steeley*

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

This article examines whether UK portfolio returns are time varying so that expected returns follow an AR(1) process as proposed by Conrad and Kaul for the USA. It explores this hypothesis for four portfolios that have been formed on the basis of market capitalization. The portfolio returns are modelled using a kalman filter signal extraction model in which the unobservable expected return is the state variable and is allowed to evolve as a stationary first order autoregressive process. It finds that this model is a good representation of returns and can account for most of the autocorrelation present in observed portfolio returns. This study concludes that UK portfolio returns are time varying and the nature of the time variation appears to introduce a substantial amount of autocorrelation to portfolio returns. Like Conrad and Kaul if finds a link between the extent to which portfolio returns are time varying and the size of firms within a portfolio but not the monotonic one found for the USA. © 2004 Taylor and Francis Ltd.

Original languageEnglish
Pages (from-to)975-979
Number of pages5
JournalApplied Financial Economics
Volume14
Issue number13
DOIs
Publication statusPublished - Sep 2004

Keywords

  • UK portfolio returns
  • market capitalization

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