Cross-Autocorrelation in Asian Stock Markets

Abstract

Five Asian stock markets (Hong Kong, Japan, South Korea, Taiwan, and Thailand) and the U.S. stock market are evaluated for evidence of cross-autocorrelation. We find evidence of Lo and MacKinlay's (1990a) cross-autocorrelation in each of the five 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. We also find weak evidence of across-ocean and inter-Asian cross-autocorrelation; in several countries, monthly returns on portfolios of small Asian stocks are correlated with the lagged return on a portfolio of large U.S. stocks and large stocks in other Asian countries. We also confirm McQueen, Pinegar, and Thorley's (1996) finding of directional asymmetry in the U.S., with small stocks responding to lagged good, but not bad, news. However, the directional asymmetry is not universal and is significant only in the U.S. and Taiwan. Similarly, after correcting for small stock autocorrelation, large stocks retain their predictive power in some, but not all, of the markets. We also find that the degree of cross-autocorrelation has not weakened since the market correction of 1987. Our findings help shed light on existing explanations of the cross-autocorrelation puzzle and give direction for further research.

JEL Classification: G15, G14, F36