Lo and MacKinlay (1989; 1990a; 1990b) report strong serial correlation in the returns of small cap portfolios. In addition, they find large caps leading small caps. The double ranking of Fama and French (1992) allows a closer look at serial correlation of style portfolios. The two groups large caps and small caps can be separated into six finer market segments which match a size criterion as well as a valuation criterion. Based on these six market segments or combined styles, Fama and French (1993-1998) introduce two new risk factors which may be able to capture risks associated with changes in the real economy. In parallel, Boudoukh, Richardson, and Whitelaw (1994) introduce the concept of implied cross-autocorrelation, which enables a breakdown of cross-autocorrelation into serial correlation and contemporaneous correlation.


Serial Correlation Market Segment Sharpe Ratio Random Walk Model Significant Serial Correlation 
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© Gabler | GWV Fachverlage GmbH 2010

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  • Patrick Scheurle

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