Return transmission and volatility spillover in dual-listed Nikkei 225 index futures markets : a multivariate GARCH analysis

Abstract

By means of a multivariate asymmetric VECM-GARCH-M model, this paper investigates the price transmission mechanism of the dual-listed Nikkei 225 Index futures through both return and volatility channels. Using daily data from the Chicago Mercantile Exchange and the Osaka Stock Exchange, we test the two prevailing schools of thought in global financial information transmission namely the international center hypothesis and the home bias hypothesis. Our results show significant support for the former in the return channel while support for the latter in the volatility channel. Return transmission reflects the fundamental linkage between the U.S. and Japanese economies as well as the psychological responses of global investors. Volatility spillovers between these two markets indicate the gradual release of private information from the Japanese market and the overreaction of the U.S. market.