Tbe Review of Financial Studies/ Spring 1988 For all stocks, the average serial correlation is-3 percent, and-6 percent the smallest 100 stocks. However, the serial correlation is both statis lly and economically insignificant and provides little evidence again the random walk hypothesis. For example, the largest average z*(q)sta tistic over all stocks occurs for q=4 and is-0.90(with a cross-sectional standard deviation of 1. 19); the largest average z*(g) for the 100 smallest stocks is -1.67(for q =2, with a cross-sectional standard deviation of 1.75). These results complement French and Roll's (1986)finding that daily returns of individual securities are slightly negatively autocorrelated For comparison, panel B reports the variance ratios of equal- and value weighted portfolios of the 625 securities. The results are consistent with those in Tables 1 and 2; significant positive autocorrelation for the equal- weighted portfolio, and less significant positive autocorrelation for the That the returns of individual securities have statistically insignificant autocorrelation is not surprising. Individual returns contain much com pany-specific, or"idiosyncratic, " noise that makes it difficult to detect the presence of predictable components. Since the idiosyncratic noise is largely attenuated by forming portfolios, we would expect to uncover the pre lictable"systematic" component more readily when securities are com bined. Nevertheless, the negativity of the individual securities'autocor- relations is an interesting contrast to the positive autocorrelation of the portfolio returns. Since this is a well-known symptom of infrequent trading we consider such an explanation in Section 3 3. Spurious Autocorrelation Induced by Nontrading Ithough we have based our empirical results on weekly data to minimize the biases associated with market microstructure issues, this alone does not ensure against the biases' possibly substantial influences. In this section we explicitly consider the conjecture that infrequent or nonsynchronous trading may induce significant spurious correlation in stock returns. 17The common intuition for the source of such artificial serial correlation is that capitalization stocks trade less frequently than larger stocks. There fore, new information is impounded first into large-capitalization stock prices and then into smaller-stock prices with a lag. This lag induces a positive serial correlation in, for example, an equal-weighted index of stock eturns. Of course, this induced positive serial correlation would be less pronounced in a value- weighted index. Since our rejections of the random walk hypothesis are most resounding for the equal-weighted index, they may very well be the result of this nontrading phenomenon. To investigate his possibility, we consider the following simple model of nontrading. 18 and Williams (1977) and Cohen et al.(1983) ed in discrete time for simplicity, it is in fact slightly more general than (1977)continuous-time model of nontrading. Specifically, Scholes and williams