Does the relationship between small and large portfolios' returns confirm the lead-lag effect? Evidence from the Athens Stock Exchange

This paper investigates whether lead-lag patterns exist between small and large size portfolios constructed from stocks traded in the Athens Stock Exchange (ASE). We examine this relationship in both the short-run (by using the correlation-based approach of Lo and MacKinlay, 1990 and the generalised impulse response analysis by Pesaran and Shin, 1996, 1998) and the long-run by employing the cointegration-based methodology of Kanas and Kouretas (2005). Furthermore, upon identifying that cointegration exists we then use the estimated error correction models (ECMs) to obtain out-of-sample forecasts of small-firm portfolio returns and it is shown that these ECMs have superior forecasting performance relative to models without the error correction terms. Therefore, we were able to provide a richer exploration of the lead-lag relationships than the one obtained by standard autocorrelation and cross-correlation analysis and vector autoregression analysis. The main finding of our analysis is that a lead-lag effect between small and large size portfolios was established in both the short-run and the long-run for the Athens equity market.