Conditional autocorrelation and stock market integration in the Asia-Pacific

Abstract

This paper considers the relationship between stock market autocorrelation and i) the presence of international investors which is proxied by the level of capital market integration, and ii) stock market volatility. Drawing from a sample of stock indices for a range of emerging or newly emerged markets, significant evidence of a relationship between the presence of international investors and the level of stock market autocorrelation is found. This evidence is consistent with the view that international investors are positive feedback traders. Robustness testing of this model suggests that the trading strategy of international investors changed as a result of the Asian currency crisis. The evidence for the role of volatility in explaining autocorrelation is, however, is generally weak and varies across the sample countries.