We decompose stock return autocorrelation into spurious components—the nonsynchronous trading effect (NT) and bid-ask bounce (BAB)—and genuine components—partial price adjustment (PPA) and time-varying risk premia (TVRP),using four key ideas: theoretically signing or bounding the components; computing returns over disjoint subperiods separated by a trade to eliminate NT and greatly reduce BAB; dividing the data period into disjoint subperiods to obtain independent measures of autocorrelation; and computing the portion of the autocorrelation that can be unambiguously attributed to PPA. We analyze daily individual and portfolio return autocorrelations in ten years’ NYSE transaction data and find compelling evidence that the PPA is a major source of the autocorrelation.

We find compelling evidence that stock return autocorrelation is not spurious. Specifically, we find that partial price adjustment is an important source, and in some cases the main source, of the autocorrelation. In contrast to previous tests, our tests of partial price adjustment are direct, using disjoint time intervals, separated by a trade, to eliminate the nonsynchronous trading effect. We find compelling evidence of partial price adjustment in several settings, involving both individual stocks and portfolios. We also find evidence for partial price adjustment in an unlikely setting: the incorporation of very public, non-firm-specific information into the price of individual stocks. Several of our tests allow us to estimate lower bounds on the fraction of the autocorrelation that comes from partial price adjustment; in each case, we find the fraction is very substantial.