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Transmission of Stock Returns and Volatility between the U.S. and Japan: Evidence from the Stock Index Futures Markets

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  • Ming-Shiun Pan
  • L. Hsueh
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    Abstract

    In this paper, we examine the nature of transmission of stock returns and volatility between the U.S. and Japanese stock markets using futures prices on the S&P 500 and Nikkei 225 stock indexes. We use stock index futures prices to mitigate the stale quote problem found in the spot index prices and to obtain more robust results. By employing a two-step GARCH approach, we find that there are unidirectional contemporaneous return and volatility spillovers from the U.S. to Japan. Furthermore, the U.S.'s influence on Japan in returns is approximately four times as large as the other way around. Finally, our results show no significant lagged spillover effects in both returns and volatility from the Osaka market to the Chicago market, while a significant lagged volatility spillover is observed from the U.S. to Japan. Copyright Kluwer Academic Publishers 1998

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    Bibliographic Info

    Article provided by Springer in its journal Asia-Pacific Financial Markets.

    Volume (Year): 5 (1998)
    Issue (Month): 3 (November)
    Pages: 211-225

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    Handle: RePEc:kap:apfinm:v:5:y:1998:i:3:p:211-225

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    Web page: http://springerlink.metapress.com/link.asp?id=102851

    Related research

    Keywords: spillover effect; nonsynchronous trading; stock index futures;

    References

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    1. Ross, Stephen A, 1989. " Information and Volatility: The No-Arbitrage Martingale Approach to Timing and Resolution Irrelevancy," Journal of Finance, American Finance Association, vol. 44(1), pages 1-17, March.
    2. Boudoukh, Jacob & Richardson, Matthew P & Whitelaw, Robert F, 1994. "A Tale of Three Schools: Insights on Autocorrelations of Short-Horizon Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 539-73.
    3. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    4. Bae, Kee-Hong & Andrew Karolyi, G., 1994. "Good news, bad news and international spillovers of stock return volatility between Japan and the U.S," Pacific-Basin Finance Journal, Elsevier, vol. 2(4), pages 405-438, December.
    5. Aggarwal, Raj & Park, Young S., 1994. "The relationship between daily U.S. and Japanese equity prices: Evidence from spot versus futures markets," Journal of Banking & Finance, Elsevier, vol. 18(4), pages 757-773, September.
    6. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 123-52.
    7. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
    8. Susmel, Raul & Engle, Robert F., 1994. "Hourly volatility spillovers between international equity markets," Journal of International Money and Finance, Elsevier, vol. 13(1), pages 3-25, February.
    9. Theodossiou, Panayiotis & Lee, Unro, 1993. "Mean and Volatility Spillovers across Major National Stock Markets: Further Empirical Evidence," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(4), pages 337-50, Winter.
    10. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
    11. Lin, Wen-Ling & Engle, Robert F & Ito, Takatoshi, 1994. "Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 507-38.
    12. Mervyn A. King & Sushil Wadhwani, 1989. "Transmission of Volatility Between Stock Markets," NBER Working Papers 2910, National Bureau of Economic Research, Inc.
    13. Errunza, Vihang R. & Losq, Etienne, 1985. "The behavior of stock prices on LDC markets," Journal of Banking & Finance, Elsevier, vol. 9(4), pages 561-575, December.
    14. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    15. Stoll, Hans R. & Whaley, Robert E., 1990. "The Dynamics of Stock Index and Stock Index Futures Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(04), pages 441-468, December.
    16. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
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    Cited by:
    1. George Milunovich & Susan Thorp, 2005. "Valuing Volatility Spillovers," Research Papers 0506, Macquarie University, Department of Economics.
    2. Malik, Farooq & Hammoudeh, Shawkat, 2007. "Shock and volatility transmission in the oil, US and Gulf equity markets," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 357-368.
    3. Ewing, Bradley T. & Malik, Farooq & Ozfidan, Ozkan, 2002. "Volatility transmission in the oil and natural gas markets," Energy Economics, Elsevier, vol. 24(6), pages 525-538, November.
    4. Nikolaos Sariannidis & Evangelos Drimbetas, 2008. "Impact of international volatility and the introduction of Individual Stock Futures on the volatility of a small market," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 119-.
    5. Chng, Michael T., 2004. "The trading dynamics of close-substitute futures markets: evidence of margin policy spillover effects," Journal of Multinational Financial Management, Elsevier, vol. 14(4-5), pages 463-483.

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