Volatility and serial correlation: revisiting the LeBaron effect

According to the LeBaron effect, serial correlation is low when volatility is high and vice-versa. We show that it is true only for the predictable part of the volatility, while volatility which cannot be forecasted is positively linked to serial correlation. Since the mechanism of price formation can be very different in small and large markets we investigate the effect of volatility on intraday serial correlation in Italy (a small market) and U.S. (a large market). We find substantial differences in the impact of volatility in the two markets.