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Part C
International Financial Market Linkages and Integration
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Chapter 9
Information Leadership in the Advanced Asia-Pacific Stock Markets: Return, Volatility and Volume Information Spillovers from the US and Japan
Suk-Joong Kim
Abstract
This chapter investigates the nature of the stock market linkages in the advanced Asia-Pacific stock markets of Australia, Hong Kong, Japan and Singapore with the US and the information leadership of the US and Japan in the region since the early 1990s. It has been found that both the contemporaneous return and volatility linkages were significant and tended to be more intense after the 1997 Asian crisis period. However, the investigation of the dynamic information spillover effects in terms of returns, volatility and trading volume from the US and Japan did not produce such time-varying influence. In general, significant dynamic information spillover effects from the US were found in all the Asia-Pacific markets, but the Japanese information flows were relatively weak and the effects were country specific.
Keywords: Information spillover; Asia-Pacific stock markets; trade volume.
JEL Classification: G15; G14
1.Introduction
The existence of financial market linkages amongst advanced equity markets is well documented. Numerous researchers find significant contemporaneous return correlations which is not surprising considering the implications of international capital asset pricing models. In addition, dynamic market interdependences which indicate causal relationships were also investigated by many researchers who report significant price and volatility spillovers between advanced markets (inter alia Hamao, Masulis and Ng, 1990; Theodossiou and Lee, 1993; Koutmos and Booth, 1995; Connolly and Wang, 2000; Bae, Karolyi and Stulz, 2000). A common finding in these studies is the role of the US market in leading other major markets. In addition to return and volatility spillovers, the information content of the US trading volume had a significant causal influence in other markets (e.g., see Lee and Rui, 2002).1 These contemporaneous and dynamic inter-market linkages intensified after the 1987 global stock market crash. Arshanapalli and Doukas (1993), among others, find enhanced market linkages with increasing US influence on French, German and the UK markets for the post crisis period. However, the literature reports a negligible role of the Japanese market in information leadership, despite the Japanese stock market being world’s second largest, and an absence of significant market linkages between Japan and other major markets of the US and Western Europe.2
Asia-Pacific financial markets also exhibit significant and growing interdependence. The increasing regionalisation of economic activities since the mid-1980s and the liberalisation of stock markets from late 1980s resulted in regional economic integrations (Phylaktis, 1997 and 1999) and growing stock market interdependence (Janakiramanan and Lamba, 1998; Pan, Liu and Roth, 1999). Market linkages are noticeably greater for the post-1987 period as reported in Arshanapalli, Doukas and Lang (1995), and for the post-1997 period (Chow, 1999; Kaminsky and Schmukler, 1999; Girard and Rahman, 2002). In addition, information leadership of the US market is confirmed in the Asia-Pacific markets as evidenced by significant first and second moment return spillovers (inter alia Arshanapalli, et al., 1995; Pan and Fung, 1996; Lin and Pan, 1997; Liu et al., 1999; Janakiramanan and Lamba, 1998; Girard and Rahman, 2002). Another potential source of information flow for the Asia-Pacific markets is Japan due to its economic linkages with the rest of the countries in the region. A number of studies report significant spillover effects from both the US and the Japanese markets to the Asia-Pacific markets especially since the East Asian financial crisis of 1997 (Liu and Pan, 1997; Cha and Cheung, 1998; Cha and Oh, 2000; and Ng, 2000). However, despite close economic linkages (especially from the mid to late 1980s) among Japan and other regional countries, the influence of the Japanese stock market had not been very strong until the onslaught of the financial crises in the East Asian countries in 1997 (Chow, 1999; Cha and Oh, 2000).
The existing body of studies concentrates mostly on weekly return horizons (and at best, daily) in their investigations of market linkages and information spillover effects, and it rarely go beyond the examination of the first and second moment spillover effects. Due to the existence of trading time differences between the US and the Asia-Pacific, disaggregating the daily return horizons into overnight and intradaily periods would produce better insights into the nature of the market interdependence as this would allow the investigation of contemporaneous (co-movements) and dynamic (causation) information spillover effects. This research angle has been neglected by many researchers. In addition, the information content of the US and Japanese market trading volumes would potentially prove useful in providing additional tradable information for the Asia-Pacific markets. To the extent that volume information can be used to infer future stock returns (Blume, Easley and O’Hara, 1994) and that US and Japanese market returns lead other Asia-Pacific markets, the inclusion of the volume information in the analysis would allow much richer investigation of the US and Japanese stock market leadership in the region. The aim of this paper is to address these issues. Specifically, the time varying nature of the stock market linkages amongst advanced stock markets in the Asia-Pacific region and the US is investigated and the role of the information leadership of the US and Japan in the region is examined. The major findings of the chapter are: (i) contemporaneous return and volatility correlations amongst the US and the advanced Asia-Pacific stock markets of Australia, Hong Kong, Japan and Singapore are positive and significant, and are considerably higher in the post-1997 Asian crisis period; (ii) in addition to return and volatility spillovers, significant dynamic spillover effects of the US trading volume are found in all countries; (iii) dynamic information spillover effects from Japan are generally weak and country specific; and (iv) there is no evidence of significant difference in the dynamic spillover effects before and after the 1997 Asian crisis period. Thus, this chapter makes following contributions to the existing literature: (i) provision of updated and comprehensive evidence on the nature of the contemporaneous and dynamic stock market linkages in the region; and (ii) new evidence that sheds light on the information leadership of the US and Japan in the region.
The rest of this chapter is organized as follows. Section 2 provides the details of the data used in the chapter and the results of the preliminary analysis of the data are presented. Section 3 contains the analyses of contemporaneous correlations of the daily returns and volatilities amongst the five countries under investigation. Section 4 provides a further evidence of market linkages in terms of causal influences of the US and Japanese intradaily returns, volatilities and trading volumes. Section 5 presents the investigations of the contemporaneous and dynamic information spillover effects from the US and Japan using the EGARCH modeling methodologies. Finally, conclusions are presented in Section 5.
2.Data and Preliminary Analysis
The stock markets investigated are the US and four advanced Asia-Pacific stock markets of Australia, Japan, Hong Kong and Singapore. Daily index observations (open, high, low and close) for the five markets and the trading volumes of the US and the Japanese markets were obtained from Commodities Systems, Inc. and Datastream for the period July 24, 1990 to March 27, 2002.3 The indexes are All Ordinaries, TOPIX, Hang Seng, Straits Times and S&P 500, respectively for each country. Figure 1 shows the time line of the market trading hours of the Asia-Pacific and the US markets. While there are overlaps between trading hours of the Asia-Pacific markets, the US market is closed when the other markets are operating. The information flow from the Japanese market, which can be regarded as a regional information, is thus contemporaneous while the (overnight) US market movements, which constitute global information, can influence the Asia-Pacific markets when they open three to four hours after the close of the US market. Various holding periods for returns and volatilities can be constructed with a view to ascertaining the nature of contemporaneous and lead-lag relationships amongst the five markets. These are daily(D), overnight(ON) and intradaily(ID). The daily return period is from closing price on day t − 1 to closing price on day t, which envelopes the overnight return period (closing on day t − 1 to opening on day t) and the intradaily return period (opening to closing on day t). The daily and overnight return periods on (calendar) day t in the Asia-Pacific markets overlap with the US intradaily return period on day t − 1, whereas intradaily return on day t periods do not (see Figure 1).
The summa...
