iShares Australia: a clinical study in international behavioural finance

Using iShares Australia returns as a proxy for the influence of overseas investors in the Australian market, we found that U.S.-based investors in the Australian market overreact to contemporaneous and lagged returns of the U.S. equity market, the U.S.–Australian dollar exchange rate, and past iShares Australia returns. In response to changing conditional risk, however, investors behave rationally: increasing (decreasing) expected risk is associated with falling (rising) prices. In light of these findings, we hypothesize that behavioral finance might explain the observed correlations between international equity markets.