The U-Shape Autocorrelation Pattern in International Stock Markets

Abstract

Employing monthly data from twenty stock markets, this paper tests for the international applicability of a U-Shape autocorrelation pattern of stock market returns. It is demonstrated that the U-Shape autocorrelation pattern in stock returns is typical of many stock markets, an observation that may be exploited in an attempt to generate a trading strategy which yields an abnormal return. The paper constructs several trading strategies which differ from one another along three dimensions: the sources of information, the weights set for an international portfolio and hedging strategies of foreign exchange risk exposure. The results clearly indicate that above normal returns can be obtained from past autocorrelation patterns in different markets.