The factor analysis is used throughout the paper. Because of the large number of countries in the sample, we find is efficient to run tests on regions. In order to aggregate country data to the regional level we use one of the following weighting schemes: i) equal weighting, ii) market cap weighting, or iii) factor weighting.
Where NR is the number of countries in the region and C0i is country i’s weight. The relevant weights for the market cap weighting and factor weighting are given in Appendix I. Generally, we run tests with all three weighting schemes, but only report one result. The choice of the weighting scheme is not found to drive our results read.
The persistence of order flow
We next examine the persistence of order flow, using variance ratio statistics as a measure. This statistic compares the variance of daily flows with the variance of flows measured over k = 2, 5, 20, and 60 day intervals. The statistic is given by:
where the last term is a degrees of freedom adjustment. Because of the large number of countries, we report variance ratios only for our designated regions. The statistic reported for each region is a the variance ratios of the factor weighted flow.
Table 3 reports variance ratios of equity trades. The data are arranged in three panels, top, middle, and bottom, showing net flows (buys minus sells), inflows (buys), and outflows (sells), respectively. Heteroskedasticity-consistent standard errors are reported beneath the point estimates.
Several facts come out of the data. First, the flows are very persistent. All of the variance ratios are statistically greater than one. Second, regional flows are persistent at low frequencies as well as at high frequencies. The evidence for this is that the variance ratio statistics increase strongly with horizon. High frequency persistence alone would lead to a leveling off of variance ratios as horizon increases. The finding of low-frequency persistence is important because it implies that our results are not an artifact of dating problems associated with time zone differences or imprecision about trade (vs. settlement) date. Such problems might significantly distort the daily autocorrelation of flows, but they would have only a minor effect on the variance ratios for the 20- and 60-day aggregation values.