Cross-autocorrelation in Asian stock markets

Abstract

We evaluate six Asian stock markets (Hong Kong, Japan, Singapore, South Korea, Taiwan, and Thailand) and the US stock market for evidence of cross-autocorrelation. We find some evidence of Lo and MacKinlay's [Lo, A., MacKinlay, C., 1990a. When are contrarian profits due to stock market overreaction? Review of Financial Studies 3, 175-205] cross-autocorrelation in all six of the Asian markets. Specifically, within each country, monthly returns on a portfolio of small stocks are correlated with the lagged returns on a portfolio of large stocks. Cross-autocorrelation is strongest in the US and weakest in Singapore and Taiwan, where the lagged response is evident only after conditioning on the direction (up or down) of the market movement. After documenting the international evidence of cross-autocorrelation, we report the results of five additional tests designed to shed light on existing explanations of the cross-autocorrelation puzzle and give direction for further research. First, we show that cross-autocorrelation exists after controlling for non-synchronous trading. Second, we do not find much evidence of across-ocean or inter-Asian cross-autocorrelation; monthly returns on portfolios of Asian stocks are generally not correlated with the lagged return on a portfolio of large US stocks or with large stocks in other Asian countries. Third, we confirm McQueen et al.'s [McQueen, G., Pinegar, J.M., Thorley, S., 1996. Delayed reaction to good news and the cross-autocorrelation of portfolio returns. Journal of Finance 51, 839-920] finding of directional asymmetry in the US, with small stocks responding to lagged good, but not bad, news. However, the directional asymmetry is not universal and is significant only in the US and Taiwan. Fourth, we show that large stocks retain their predictive power in some, but not all, of the markets after correcting for small stock autocorrelation. Fifth, we find that the degree of cross-autocorrelation in monthly returns has not weakened since the market correction of 1987.