Market Capitalization, Cross Correlations, the Lead/Lag Structure and Microstructure Effects in the Indian Stock Market

Abstract

The lead/lag relationship between large and small cap firms is investigated by using a number of Indian equity index series that differ in their market capitalisation characteristics. Large cap indices are found to lead small cap indices and to have higher speeds of adjustment towards intrinsic values. Pure thin trading effects and a thin trading/adjustment interaction effect are found to make significant contributions to the lead/lag effect. The intrinsic value processes themselves, are found to be characterised by a small degree of overreaction.