Serial correlation and heterogeneous volatility in financial markets: beyond the LeBaron effect

TL;DR

This paper investigates the relationship between serial correlation and volatility in financial markets at intraday levels, confirming the LeBaron effect and revealing a positive correlation between unexpected volatility and serial correlation.

Contribution

It extends the LeBaron effect analysis to intraday data and introduces the impact of unexpected volatility on serial correlations, integrating efficient and heterogeneous market hypotheses.

Findings

LeBaron effect holds at intraday level

Unexpected volatility positively correlates with serial correlation

Heterogeneous market effects influence intraday serial correlations

Abstract

We study the relation between serial correlation of financial returns and volatility at intraday level for the S&P500 stock index. At daily and weekly level, serial correlation and volatility are known to be negatively correlated (LeBaron effect). While confirming that the LeBaron effect holds also at intraday level, we go beyond it and, complementing the efficient market hyphotesis (for returns) with the heterogenous market hyphotesis (for volatility), we test the impact of unexpected volatility, defined as the part of volatility which cannot be forecasted, on the presence of serial correlations in the time series. We show that unexpected volatility is instead positively correlated with intraday serial correlation.