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Do Bulls and Bears Move Across Borders? International Transmission of Stock Returns and Volatility as the World Turns

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  • Wen-Ling Lin
  • Robert F. Engle
  • Takatoshi Ito

Abstract

This paper investigates empirically how returns and volatilities of stock indices are correlated between Tokyo and New York. Intradaily data are used, so that daytime and overnight returns are defined for both markets. Tokyo daytime hours overlap with New York overnight hours, while New York daytime hours overlap with Tokyo overnight hours. We find that in general Tokyo (Mew York) daytime returns are significantly correlated with New York (Tokyo) overnight returns. This suggests that information revealed during the trading hours of one market has a global impact on the returns of the other market. One exception is that after the October 1987 Crash, the Tokyo overnight returns were not significantly affected by New York daytime returns. We propose and estimate a signal extraction model with GARCH processes to determine the global factor from daytime returns. This is the problem of setting the opening price of a domestic market conditional on the foreign daytime returns. We also investigate lagged return and volatility spillovers. Except for a lagged return spillover from New York to Tokyo for the period after the Crash, there are no significant lagged spillovers in returns or in volatilities.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3911.

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Date of creation: Nov 1991
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Publication status: published as Review of Financial Studies, Volume 7, Number 3. pp 507-538. (1994)
Handle: RePEc:nbr:nberwo:3911

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  1. Barclay, Michael J & Litzenberger, Robert H & Warner, Jerold B, 1990. "Private Information, Trading Volume, and Stock-Return Variances," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 233-53.
  2. 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.
  3. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
  4. Neumark, David & Tinsley, P A & Tosini, Suzanne, 1991. " After-Hours Stock Prices and Post-Crash Hangovers," Journal of Finance, American Finance Association, vol. 46(1), pages 159-78, March.
  5. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  6. Stoll, Hans R & Whaley, Robert E, 1990. "Stock Market Structure and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 37-71.
  7. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
  8. PAGAN, Adrian, . "Some identification and estimation results for regression models with stochastically varying coefficients," CORE Discussion Papers RP -413, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(2), pages 246-73, April.
  10. Harvey, Andrew & Ruiz, Esther & Sentana, Enrique, 1992. "Unobserved component time series models with Arch disturbances," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 129-157.
  11. Solnik, B H, 1974. "The International Pricing of Risk: An Empirical Investigation of the World Capital Market Structure," Journal of Finance, American Finance Association, vol. 29(2), pages 365-78, May.
  12. Tim Bollerslev & Jeffrey M. Wooldridge, 1988. "Quasi-Maximum Likelihood Estimation of Dynamic Models with Time-Varying Covariances," Working papers 505, Massachusetts Institute of Technology (MIT), Department of Economics.
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Cited by:
  1. K.C. Chan & G. Andrew Karolyi & Rene M. Stulz, 1992. "Global Financial Markets and the Risk Premium on U.S. Equity," NBER Working Papers 4074, National Bureau of Economic Research, Inc.
  2. Craig, Alastair & Dravid, Ajay & Richardson, Matthew, 1995. "Market efficiency around the clock Some supporting evidence using foreign-based derivatives," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 161-180.
  3. repec:dgr:uvatin:2000018 is not listed on IDEAS
  4. Erik Hupperets & Bert Menkveld, 2000. "Intraday Analysis of Market Integration: Dutch Blue Chips traded in Amsterdam and New York," Tinbergen Institute Discussion Papers 00-018/2, Tinbergen Institute.
  5. Geoffrey Booth, G. & Chowdhury, Mustafa & Martikainen, Teppo, 1996. "Common volatility in major stock index futures markets," European Journal of Operational Research, Elsevier, vol. 95(3), pages 623-630, December.
  6. Goodhart, Charles A. E. & O'Hara, Maureen, 1997. "High frequency data in financial markets: Issues and applications," Journal of Empirical Finance, Elsevier, Elsevier, vol. 4(2-3), pages 73-114, June.
  7. Becker, Kent G. & Finnerty, Joseph E. & Friedman, Joseph, 1995. "Economic news and equity market linkages between the U.S. and U.K," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1191-1210, October.
  8. Eric Zitzewitz, 2003. "Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 19(2), pages 245-280, October.

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