Affiliation:
1. Department of Economics, School of Economics and Management, Anhui Jianzhu University, Hefei 230022, China
2. School of Business and Economics, Loughborough University, Loughborough LE11 3TU, UK
Abstract
This paper studies price discovery in Nikkei 225 markets through the nonlinear smooth transition price adjustments between spot and future prices and across all three futures markets. We test for smooth transition nonlinearity and employ an exponential smooth transition error correction model (ESTECM) with exponential generalised autoregressive conditional heteroscedasticity (EGARCH), allowing for the effects of transaction costs, heterogeneity, and asymmetry in Nikkei price adjustments. We show that the ESTECM-EGARCH is the appropriate model as it offers new insights into Nikkei price dynamics and information transmission across international markets. For spot–futures price dynamics, we find that futures led spot prices before the crisis, but spot prices led afterwards. This can be explained by the lower level of heterogeneity in the underlying spot transaction costs after the crisis. For cross-border futures prices, the foreign exchanges (Chicago and Singapore) lead in price discovery, which can be attributed to their roles as global information centres and their flexible trading conditions, such as a more heterogeneous structure of transaction costs. The foreign leadership is robust to the use of linear or nonlinear models, the time differences between Chicago and the other markets, and the long-run liquidity conditions of the Nikkei futures markets, and strongly supports the international centre hypothesis.
Funder
Anhui Jianzhu University
Natural Science Foundation of Anhui Province, China
Subject
Finance,Economics and Econometrics,Accounting,Business, Management and Accounting (miscellaneous)
Cited by
3 articles.
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