Information Leadership in Advanced Asia-Pacific Stock Markets: Returns. and Volatility Spillover and the role of public information from the U.S.

Transcription

1 Informaion Leadership in Advanced Asia-Pacific Sock Markes: Reurns and Volailiy Spillover and he role of public informaion from he U.S. and Japan Suk-Joong Kim School of Banking and Finance The Universiy of New Souh Wales UNSW SYDNEY 2052 Ausralia Absrac This paper invesigaes he naure of informaion leadership of he U.S. and Japan in advanced Asia-Pacific sock markes of Ausralia, Hong Kong, Singapore and Japan, and he U.S. marke for he period 2 January 1991 o 31 May Reurns and volailiy spillovers from he wo major markes and he impac of scheduled U.S. and Japanese public informaion releases are examined via he esimaion of EGARCH models of he overnigh and daily marke reurns of he five counries. Alhough significan reurns and volailiy spillover effecs from he U.S. marke are found in all counries, he Japanese marke spillovers are relevan in only some of he counries. Furhermore, he degree o which he Japanese informaion releases affec he marke movemens in he region is found o be relaively weaker compared o he impac of he U.S. daa releases. Thus, i is found ha alhough here is some evidence of he Japanese informaion leadership in he region, he U.S. marke influence is shown o be sronger. JEL Classificaion: G14, G15, F36 Keywords: Sock marke linkages, announcemen news, reurns and volailiy spillover *Corresponding auhor: Suk-Joong Kim School of Banking and Finance The Universiy of New Souh Wales UNSW SYDNEY, NSW 2052 Ausralia Tel: Fax: s.kim@unsw.edu.au

2 1. Inroducion * The exisence of financial marke linkages amongs advanced equiy markes are well documened. Empirics sugges he presence of significan inerdependence in marke movemens and he role of he U.S. markes in informaion leadership. Significan price and volailiy spillovers beween advanced markes are repored in Hamao, Masulis and Ng (1990), Theodossiou and Lee (1993), Koumos and Booh (1995), ec. Many researchers repor ha iner-marke linkages inensified afer he 1987 global sock marke crash. For example, Arshanapalli and Doukas (1993) find enhanced marke linkages wih increasing U.S. influence on French, German and he U.K. markes for he pos crisis period. However, hey repor a negligible role of he Japanese marke in informaion leadership and an absence of significan marke linkages beween Japan and oher major markes of he U.S. and Wesern Europe. Asia-Pacific financial markes are also showing significan linkages and he degree of marke inegraion has inensified from he lae 1980s. Regional economic inegraion as evidenced by real ineres rae co-movemens is repored in Phylakis (1997 and 1999). There is also evidence of srong co-movemens of equiy markes and some evidence of volailiy spillover beween markes. Janakiramanan and Lamba (1998) repor significan firs momen linkages in marke reurns for he period 1988 o 1996, whereas Pan, Liu and Roh (1999) find some counries share common ime-varying volailiy for he period 1988 o In addiion, he reurns and volailiy linkages are noiceably greaer for he pos-1987 period as repored in Arshanapall Doukas and Lang (1995). Moreover, Chow (1999) finds evidence of even more significan linkages for he pos-1997 Eas Asian currency crisis period. * This projec was funded by an ARC small gran. 1

3 Informaion leadership of he U.S. is confirmed in he Asia-Pacific markes as evidenced by significan firs and second momen influences of he U.S. marke movemens. Arshanapall Doukas and Lang (1995) repor he U.S. marke influence (firs momen influence) seemed o be greaer during he pos-1987 period. Janakiramanan and Lamba (1998) even sugges ha he co-movemens of Asia-Pacific equiy markes can be raced o he indirec influences of he U.S. marke in he region. The oher major economic influence in he Asia-Pacific region is coming from Japan, and so he influence of he Japanese sock marke movemens on he res of he sock markes in he region is of imporance. A number of sudies repor significan spillover effecs from boh he U.S. and he Japanese markes o he Asia-Pacific markes. Cha and Cheung (1998) find evidence of significan mean spillover effecs in Hong Kong and Singapore, Liu and Pan (1997) repor boh mean and volailiy spillover effecs are presen in hese wo markes, and Ng (2000) finds small bu significan weekly volailiy spillover o a number of Asian sock markes. However, despie close economic linkages (especially from he lae 1980s) beween Japan and oher regional economies, he influence of he Japanese sock marke was no significan unil he onslaugh of he financial crises in he Eas Asian counries in Chow (1999) repors empirical evidence suggesing an increased Japanese influence in he pos-1997 crisis era. Given ha he sock marke movemens in he U.S. and Japan have significan influence on he Asia-Pacific markes, a logical nex sep in he analysis of he marke linkages would be o invesigae he impac of disaggregaed informaion flows from hese wo major markes. I is of grea ineres o examine he degree o which differen ypes of informaion ha move he U.S. and he Japanese markes direcly affec he Asia-Pacific markes. Sock markes are influenced by boh public and privae informaion. The laer can be an exension of he former in ha heerogeneiy in he inerpreaion of he implicaion of public informaion may lead o differen responses from marke paricipans. Scheduled 2

4 announcemens of macroeconomic daa injec new public informaion regarding domesic economic condiions o he marke, and o he exen ha marke paricipans are caugh by surprise and heir opimal responses are dependen on heir inerpreaion of he news significan marke movemens will resul. No only domesic marke paricipans bu also marke wachers in he Asia-Pacific financial markes closely wach he informaion conen of he U.S. and he Japanese macroeconomic informaion releases due o heir poenial marke moving influence in he region. Significan informaion conens of hese announcemens will hus direcly be facored ino he prices in he Asia-Pacific markes. Alhough here is some empirical evidence of he U.S. scheduled announcemen news effec spillovers on foreign financial markes (U.K. sock fuures: Becker, Finnery and Friedman, 1995; German and Japanese deb markes: Becker, Finnery and Kopecky, 1995; Ausralian foreign exchange and deb markes: Kim, 1998, Kim and Sheen, 2000), hey are confined o advanced markes, and o he bes of he Auhor s knowledge he U.S. news effecs have no been invesigaed on advanced Asian sock markes nor has here been an empirical research on he impac of he Japanese informaion releases on foreign markes. Thus he conribuions of his paper o he lieraure are wo fold: i) providing he laes evidence of he reurns and volailiy spillover effecs from he U.S. and he Japanese sock markes o he advanced Asia-Pacific sock markes, and ii) examinaion of he degree o which scheduled U.S. and Japanese macroeconomic daa announcemens direcly impac sock markes in he Asia- Pacific counries. The major finding of he paper is ha alhough here is some evidence of Japanese influence in he region in he form of reurns and volailiy spillover and he impacs of public informaion releases on he marke volailiy in some of he markes in he region (Hong Kong and Singapore), he U.S. marke informaion leadership in boh respecs is found o be sronger in he Advanced Asia-Pacific sock markes. The res of he paper is organized 3

5 as follows: Secion 2 discusses he economeric modeling and daa consrucion issues, secion 3 repors and analyses he esimaion resuls, and secion 4 provides some conclusions. 2. Daa and economeric mehodology The sock markes invesigaed are four advanced Asia-Pacific sock markes of Hong Kong, Singapore, Ausralia and Japan, and he U.S. marke. Daily sock marke index observaions (open, high, low and close) of hese markes were obained from Commodiies Sysems, Inc. for he period 2 January 1991 o 31 May The indexes are Hang Seng, Sraigh Times, All Ordinaries, Nekkei 225 and Dow Jones, respecively for each counry. The daes and magniudes of each of he scheduled public informaion release for he U.S and he Japanese economies during he sample period were obained from Money Marke Services. In addiion, (median) marke survey expecaions of he magniudes of he economic daa from he same source were used o proxy he unexpeced componens of he announcemens. The announcemen variables considered are ones ha represen economic aciviies and ones ha conain informaion on inflaion, and only hose variables wih unbiased marke expecaions are included in his paper. 1 They are balance of paymen (BOT), real GDP growh rae (GDP), reail sales growh rae (RET), unemploymen rae (UE), producer price index inflaion (PPI) and consumer price index inflaion (CPI) for he U.S.; rade balance (TB), curren accoun balance (CAB), unemploymen rae (UE), money supply growh rae (MS), wholesale price index inflaion (WPI) and consumer price index inflaion (CPI) for Japan. Table 1 repors he deails of hese announcemen daa. 1 See he las row of Table 1 for more informaion. 4

6 Figure 1 shows he ime line of he marke rading hours of he Asia-Pacific and he U.S. markes, and he iming of he U.S. and he Japanese macroeconomic informaion releases. While here are overlaps beween rading hours of he Asia-Pacific markes, he U.S. marke is closed when he non-u.s. markes are operaing. The informaion flow from he Japanese marke, which can be regarded as a regional informaion, is hus conemporaneous while he (overnigh) U.S. marke movemens, which consiue global informaion, can influence he Asia-Pacific markes when hey open hree o four hours afer he close of he U.S. marke. The role of he U.S. and he Japanese marke influences are hen invesigaed by i) examining he naure of he marke linkage by uilizing lagged U.S. and Japanese marke movemens (firs and second momens of marke index reurns) as explanaory variables in economeric models ha explain daily movemens of sock marke reurns and reurns volailiies, and ii) asceraining he naure of he news effecs of he informaion releases from he U.S. and Japan on he firs and second momens of he reurns of each sock marke consruced o surround he informaion releases. All six U.S. announcemens were made (08:30 Easern Sandard Time) one hour before he U.S. marke opens and while all he Asia-Pacific markes were closed. The marke reurns ha capure he U.S. informaion releases are hus calculaed over he opening price one calendar day afer he announcemens and he closing price on he day before for he Asia-Pacific markes (overnigh reurns on calendar dae +1, ln(open +1 / Close ) 100), and over he opening price on he announcemen day and he closing price observed he day before for he U.S. marke (overnigh reurns on calendar dae, ln(open / Close -1 ) 100). The Japanese informaion releases were made a various imes hroughou he announcemen day, four announcemens jus before he Japanese marke opening and he oher wo while he marke was open. Thus, he Japanese announcemens were made eiher jus before marke opening or while markes were open in he Asia-Pacific markes, and while he U.S. marke 5

7 was closed. The impacs of he Japanese economic announcemens are hen examined over he period beween he closing price on he announcemen day and he closing price on he day before for he Asia-Pacific markes (daily reurns on calendar dae, ln(close / Close - 1) 100), while he period for he U.S. marke is over he opening price on he same calendar dae as he Japanese announcemen dae and he closing price he day before (overnigh reurns on calendar dae, ln(open / Close -1 ) 100). The summary saisics of he overnigh and daily marke reurns of he U.S. and he Asia-Pacific markes surrounding he U.S. and he Japanese economic variable announcemens are shown in Table 2. The common characerisics of he reurns are significan skewness, lepokurosis, highly significan linear and non-linear serial correlaion, and asymmeric responses of volailiy o innovaions. These characerisics are ypical of higher frequency financial reurns. Economeric modeling of he reurns series mus accoun for hese momen characerisics, and various researchers have shown ha daily sock price movemens, along wih many oher higher frequency financial ime series, are adequaely modeled by he generalized auoregressive condiional heeroskedasic (GARCH) family of models. I has been repored ha exponenial GARCHin-mean models wih an appropriae disribuional assumpion explain he daily sock price movemens well (see Bollerslev, e. al, 1992 for an exensive survey of empirical papers). In his paper, parsimonious MA (moving average) - EGARCH(1,1)-in-Mean models are used o model he reurns series wih asymmeric response characerisics and hey are shown below. U.S. informaion flows R CPI q 1/ 2 = c + α i, Mon Mon + α i, dus RUS, 1 + α hh + α jusnews j, 1 + α kε i, k j= BOT k= 1 α (1a) ε i, = z h ~ (0, h ), z ~ iid(0,1) 6

8 ln h = β c + ln h -1 + β ε1 ε 1 h β 1 Mon + β ε 2 Mon + β ε h 1 1 USvol 2 + π Vol US 1 + CPI j= BOT β USNEWS j j, 1 (1b) Japanese informaion flows R CPI q 1/ 2 = c + α Mon Mon + α djprjp, 1 + α hh + α j JPNEWS j, + α kε k j= TB k = 1 α (2a) ln h = β c + ln h 1 + β ε1 ε 1 h 1 + β β ε 2 Mon ε h 1 1 Mon + β 2 + π JPvol Vol J 1 + CPI j= TB β j JPNEWS j, (2b) Where: R i, = The percenage reurns of sock indexes measured around he U.S. and he Japanese public informaion releases. Ln(Open /Close -1 ) 100 for boh he U.S. and he Asia- Pacific markes in he case of he U.S. informaion releases. Ln(Close /Close -1 ) 100 for he Asia-Pacific markes and Ln(Open /Close -1 ) 100 for he U.S. marke in he case of he Japanese informaion releases. i = Ausralia, Japan, Hong Kong, Singapore and he U.S. MON = Monday dummy ha akes one for Mondays and zero oherwise. h = Condiional volailiy of sock marke reurns for counry i a ime. USNEWS j,, = US informaion release dummies ha ake he value of one on days of relevan U.S. variable announcemen and zero oherwise. j = Balance of Trade, GDP, Reail sales, Unemploymen rae, PPI and CPI inflaion. JPNEWS j,, = Japanese informaion release dummies ha ake he value of one on days of relevan U.S. variable announcemen and zero oherwise. j = Trade Balance, Curren accoun balance, Unemploymen rae, Money supply growh, WPI and PPI inflaion. q = Number of moving average erms included in he condiional mean equaion o remove serial correlaion in he esimaed sandardized residuals, z. US Vol 1 = A Garman-Klass measure of inraday price volailiy of he U.S. sock marke a day -1. JP Vol = A Garman-Klass measure of inraday price volailiy of he Japanese sock marke 1 a day -1. Addiional variables included in he condiional mean and variance equaions are he mean and volailiy spillover variables, he informaion announcemen dummies and he Monday dummy. 7

9 The U.S. marke has been proven o have a significan leading influence on he Asia- Pacific Markes (Arshanapall e al, 1995; Ghosh, Saidi and Johnson, 1999; Janakiramanan and Lamba, 1998, Lin and Pan, 1997, ec.), and he Japanese marke movemens have also been shown o be an imporan facor especially since he Eas Asian financial crisis which began in lae 1997 (Chow, 1999; Ghosh, Saidi and Johnson, 1999). The influences of he U.S. and he Japanese marke movemens are assumed o be one direcional for he smaller Markes (Ausralia, Hong Kong and Singapore) whereas he wo larger markes are assumed o have an influence on each oher. The mean dependencies are modeled by including lagged U.S. or Japanese daily reurns (i.e. R R Ln( Close / Close ) 100) in he condiional mean US, 1, JP, 1 = 1 equaions while he second momen spillover effec is modeled by including lagged inraday volailiy measures of he wo major markes in he condiional variance equaions. The lagged volailiies used are he Garman-Klass (1980) measure of volailiy of asse reurns ha uilizes four price observaions (open high, low and close) on a given day 2,3. The impac of he U.S. and he Japanese daa releases are invesigaed by including an announcemen dummy (USNEWS j and JPNEWS j ) for each variable in he condiional mean and variance equaions of he sock index reurns measured over he period surrounding he 2 Garman and Klass (1980) show ha here is a significan efficiency gain for his measure of volailiy over a simpler one such as squared or absolue price changes. I also has he advanage, compared o alernaive measures of daily volailiy such as GARCH volailiy, of being pre-deermined (a -1) and observable by marke paricipans a ime when applying wih a lag. Inradaily volailiy of he U.S. and he Japanese sock [ ] 2 marke reurns are hen calculaed as 1 2 G K Volailiy = ln( P / P ) ( 2ln( 2) 1) ln( P / P ). high low open close 2 3 Univariae GARCH(1,1) volailiies were generaed for he wo major markes and used, wih a lag, in place of he Garman-Klass volailiies. However, he resuls produced are qualiaively he same. 8

10 daa announcemens and examining he sign and significance of he esimaed coefficiens 4. The sign of he announcemen dummies in he mean equaion is o be inerpreed as he general direcion of marke movemens in he relevan markes following he informaion releases and so represening an average effec of he announcemens. The volailiy responses o he informaion evens depend on wheher he daa release resolves informaion asymmery by providing level informaion playing field or i adds o he level of informaion uncerainy in he marke. Some macroeconomic news announcemens may increase he heerogeneiy of beliefs and hus furher disurb a financial marke. This migh occur for a low volailiy macroeconomic variable for which a widespread consensus develops relaively easily abou is imporance and relevance. In he days approaching he nex announcemen, he marke may sele owards some degree of homogeneiy of beliefs. When surprises are announced, he homogeneiy evaporaes giving rise o excied ransacion volumes and hus condiional price volailiy. As ime goes by, beliefs abou he fundamenal implicaions of he previous announcemens begin o converge. The marke exciing effec is represened by a posiive announcemen coefficien in he condiional volailiy equaion. By conras, some oher ypes of macro news announcemen may end o almos immediaely sele a marke. For hese macroeconomic variables, some individual paricipans in asse markes may have a poor undersanding or convicion abou he imporance and relevance of hese variables, while ohers may have relaively beer knowledge or convicion. Leading up o hese announcemens, nervous rading occurs based on he diversiy of knowledge or convicion abou he possible value ha will be conained he announcemen. The release of new informaion, hus, adds o curren informaion ses and so may have he effec of reducing he 4 In place of he announcemen dummies, magniudes of surprises measured by acual daa released minus he MMS survey expecaions were also ried. The resuls of he magniude esimaions are much he same as he announcemen dummy esimaions repored in his paper, and so hey are no repored o conserve space. 9

11 degree of informaion asymmery in he marke. Afer he announcemens, he bigger he surprise, he less likely are he ill informed o rade, and he more likely is a price adjusmen reflecing he knowledge or convicion of he oher group. Thus he surprise in such announcemens has a calming effec by sidelining hose less able or unwilling o ake a differen posiion. A good example of an imporan paricipan who migh ac wih knowledge and convicion is he cenral bank. Afer a large macroeconomic surprise, he cenral bank may adjus is policy insrumen o affec he condiional mean of, say, he shor erm ineres rae, bu i may also decide o demonsrae an exra degree of firmness in is sance by acing o reduce he volailiy of ha rae (i.e. by smoohing ). If marke paricipans believe ha is a credible sance, hey will be less willing o rade. The marke calming effec is shown by a negaive announcemen coefficien in he condiional volailiy equaion. In addiion o he general marke responses o he informaion releases, he effecs of good and bad news announcemens are also invesigaed for heir poenial differenial impac on he markes. In general, here is considerable evidence of equiy markes showing higher levels of volailiy and more inensive volailiy spillovers beween markes during crisis periods. Thus, bad (worse han expeced) economic daa announcemens would be perceived o have differen informaion conen compared o good ones, and so hey would elici differen marke responses. Modeling he asymmeric effec of good and bad news announcemens requires a measure of marke expecaions on he magniudes of announced variables. The mos widespread approach is o uilize marke based survey expecaions provided by Money Marke Services. We follow his approach and proxy marke expecaions by he survey of he U.S. and he Japanese marke expecaions of heir scheduled informaion releases generaed by Money Marke Services in he U.S. and Japan. Bad news announcemen days are when he magniudes of he announced daa are smaller han he marke expecaions for he economic aciviy variables (BOT, GDP and RET for he U.S.; 10

12 and TB, CAB for Japan) and when higher han expeced inflaion daa (PPI and CPI for he U.S.; and WPI, CPI and MS for Japan) and unemploymen daa. The good news announcemens are defined as he reverse of he bad news announcemens. The EGARCH models wih good and bad announcemen dummies (considered separaely) for each variable in boh he condiional mean and he variance equaions address he poenial asymmeric effecs of good and bad news announcemens. The good (bad) news dummies ake he value of one on he days of good (bad) news announcemens and zero oherwise. They replace he announcemen news dummies in (1) and (2) Empirical resuls For ease of exposiion, he invesigaions of reurns and volailiy spillovers and he impac of public informaion releases are repored separaely. Tables 3 and 4 repor he quasinormal maximum likelihood esimaion resuls for he EGARCH models in (1) and (2) wihou he announcemen dummies, and Tables 5 and 6 show he summary of he esimaed 5 There also exiss a poenial for asymmeric effecs of large news days. If announced magniudes of each variable depar significanly from prior marke expecaions, flurry of marke aciviies would follow resuling in higher rading volume leading o higher flucuaions in asse reurns and reurns volailiies on hese days compared o average news days. On he oher hand, marke paricipans who are unsure abou he implicaions of significan announcemens migh be hesian o rade unil follow up informaion, such as official response from he moneary auhoriies, is released or hey have some ime o size up he marke condiions. The differenial impacs were modeled by he EGARCH models wih above average news dummies for each variable ha ake he value of one on days of larger han sample average (in magniudes) surprise and zero oherwise. The esimaion resuls, in general, do no differ significanly from he general esimaion of announcemen dummies, and so hey are no repored in he paper o save space. Ineres readers may obain he resuls from he auhor. 11

13 announcemen coefficiens from various esimaions using overall, good news and bad news announcemen dummies considered separaely in (1) and (2) Reurns and volailiy spillovers The esimaion resuls for he esing of reurns and volailiy spillovers from he U.S. marke are shown in Table 3. Lagged U.S. reurns are shown o have a significan influence on he overnigh reurns of all he Asia-Pacific markes. The posiive and highly significan coefficiens are an indicaion ha hese markes followed he global rend se by he previous day s U.S. marke movemens, suggesing a srong U.S. influence in he region. This implies ha he facors moving he U.S. marke he previous day were inerpreed o have similar effecs on he Asia-Pacific markes as well. In addiion, he U.S. overnigh reurns were srongly influence by is lagged daily reurns. The U.S. influence is found o be sronges in Hong Kong (and weakes in Ausralia) judging by he magniude of he mean spillover coefficien, α dus, which is more han 30 imes he size of ha for Ausralia. This resul is no surprising on accoun of he igh financial linkages beween Hong Kong and he U.S. due o he Hong Kong dollar s peg o he US dollar. The U.S. marke influence is also noiceable in erms of he volailiy spillover. The U.S. inradaily volailiy as measured by he G-K volailiy had a significan effec on he esimaed condiional variances of he overnigh marke reurns in all cases. The volailiy spillover coefficien, β USVOL, is posiive and highly significan for Japan, Hong Kong and Singapore indicaing a higher volailiy in he U.S. marke led o a higher volailiy in hese markes. The conagion of marke volailiy migh imply he ransmission of he rading environmen ha caused elevaed levels of volailiy which include higher rading volume and heighened level of uncerainy in he markes. For 6 The full esimaion resuls are available from he auhor for ineresed readers. 12

14 example, an arrival of an imporan piece of informaion wih a poenial o affec he general marke condiions migh induce higher rading volumes, and so frequen price movemens and higher reurns volailiy will resul. The Asia-Pacific markes migh consider he overnigh U.S. marke developmens and reac o he informaion in a similar manner creaing similar rading environmen of higher rading volumes and/or heighened levels of volailiy. The Ausralian marke, however, sands alone in his regard. Higher U.S. volailiy significanly lowered he level of overnigh reurn volailiy in he Ausralian marke. A possible explanaion for his seemingly inconsisen resul wih he res of he Asia-Pacific markes maybe ha he sources of higher volailiy in he U.S. marke had a marke calming effec in Ausralia. Tha is, he Ausralian marke paricipans, in general, managed o adequaely inerpre he implicaions of he overnigh U.S. informaion o he Ausralian marke so as o reduce he level of uncerainy. Table 4 repors he influence of he Japanese marke movemens. The reurns spillover from he Japanese marke is srongly fel in Ausralia and Singapore as shown by he posiive and saisically significan, a leas a 5%, α djp. This suggess ha he daily reurns in boh markes depended no only on he global facors (he U.S. influence) bu also on he regional influences (he Japanese marke movemens). The oher markes in he region did no respond o he Japanese marke movemens excep for he U.S. marke where a significan negaive influence is shown. The Japanese marke volailiy managed o have an impac in Singapore and Japan, however, oher markes were no so responsive. In sum, alhough here is some isolaed evidence of reurns and volailiy spillovers from Japan, overnigh U.S. marke movemens proved o be a more significan facor in moving all he Pacific-Basin markes considered (including he U.S. and Japan). 13

15 The economeric modeling of he overnigh and daily reurns of he Asia-Pacific and he U.S. sock markes by he EGARCH(1,1) models are shown o be effecive as evidenced by he esimaion diagnosics ha are well behaved. The skewness and he excess kurosis of he sandardized residuals, z, are reduced in size compared o he raw reurns series, and he significan linear and non-linear serial correlaions and asymmeric responses o innovaions are eliminaed in all cases. The overnigh and daily marke reurns were, in general, lower and volailiies higher on Mondays in all markes. In addiion, here is a srong evidence of volailiy asymmery, especially in he daily reurns (shown in Table 5). I is shown ha he larger he unexpeced reurns movemens during he previous rading period he larger is he volailiy (posiive β ε2 ), and also larger volailiy is associaed wih unexpeced fall in he marke reurns (negaive β ε1 ). Lasly, he coefficien for volailiy persisence, β ε2, is less han uniy in all cases suggesing a lack of uni roo in he condiional variance series. 3.2 Impac of public informaion flows The impacs of he U.S. and Japanese informaion releases are summarized in Tables 5 and 6, respecively. The resuls repored are hree separae esimaions of (1) and (2) wih i) six public informaion announcemen dummies o pick up he overall impac of he informaion releases, ii) good announcemen dummies for hose announcemens ha are beer han marke expecaions and iii) bad news announcemen dummies for worse han expeced announcemens. In order o save space, only he coefficiens for he announcemens are repored 7. 7 The esimaed coefficiens of he oher variables are fundamenally he same as hose repored in Tables 4 and 5. This is so because only he naure of he announcemen dummies (general announcemen dummies, good and 14

16 U.S. informaion releases There is no evidence of significan influence of he U.S. informaional releases in he condiional mean of he overnigh Ausralian marke reurns excep for he negaive impac of worse han expeced (bad news) BOT announcemens. This suggess a lack of a direc linkage beween he disaggregaed U.S. informaion releases and he Ausralian sock price movemens. However, he U.S. informaion flows had a significan influence on he condiional volailiy in all cases excep for he UE news. An increased level of condiional volailiy is observed in he case of BOT, GDP and CPI inflaion announcemens, and lower volailiy when he RET and PPI inflaion announcemens were made. This indicaes ha he U.S. daa releases did no direcly affec he Ausralian marke bu hey provided enough informaion o eiher simulae he rading aciviies or reduce he level of uncerainy in he marke. In addiion, here is evidence of asymmerical response of good and bad news announcemens. Bad BOT announcemens raised he condiional volailiy while good ones failed o elici any response. The opposie resul is observed for he PPI inflaion news. The Japanese marke reurns were higher following he announcemens of he BOT daa, and depressed when he GDP and he PPI announcemens were made. Bad news announcemens (BOT and CPI inflaion) lifed he Japanese marke while good news (GDP, UE, PPI and CPI inflaion) dampened i. Some announcemens (BOT, RET and CPI) raised he condiional volailiy while PPI daa reduced i. I is of ineres o noe ha he CPI and PPI announcemens had opposie effecs on he Japanese (and also he Ausralian) marke. A possible explanaion is ha he implicaions of he U.S. PPI daa were adequaely undersood bad news announcemen dummies) is changed wih he oher EGARCH variables unchanged across he differen dummy esimaions. Deailed resuls of he esimaions (variable esimaes and he model diagnosics no repored here) are available from he auhor. 15

17 in he Japanese and Ausralian marke paricipans due o heir rade implicaions, however, he CPI daa releases simulaed heerogeneiy in he inerpreaions of heir implicaions leading o a higher level of uncerainy. Bad news announcemens, in general, had more informaion conen han good news ones. The Hong Kong marke reurns were also responsive o he U.S. informaion. The wo inflaion variables and he UE daa increased he Hong Kong marke reurns whereas he RET daa reduced i. The significance of he PPI inflaion daa is driven by he good news announcemens while he bad news ones are responsible for he significance in he oher wo variables. On he condiional volailiy side, arrivals of hree announcemens (GDP, RET and PPI inflaion) sirred up he marke aciviy enough o raise he marke volailiy. In general, good news announcemens affeced he marke volailiy more han he bad news ones which is opposie o wha is found for he Japanese marke. The Singaporean marke reurns were also significanly affeced by he U.S. announcemens. All bu one announcemen (PPI inflaion) had a significan influence overall. The reurns were higher in response o he BOT, GDP and CPI daa releases and lower following he announcemens of he ohers. The worse han expeced PPI inflaion daa raised he marke reurns, however, due o he offseing effecs of he good news announcemens overall effec is insignifican. There is some evidence of asymmeric volailiy responses. Two of he bad news announcemens and hree of he good news daa caused significan responses. However, hese asymmeric effecs are no ranslaed ino significan overall effecs. In paricular, he marke calming effecs of bad unemploymen daa is counerbalanced by good announcemens leading o overall insignificance. Ineresingly, he U.S. economic daa releases failed o generae a significan response from he U.S. marke. Only he BOT and RET daa show some influence on he marke 16

18 reurns. The reurns volailiy is equally non-responsive, in general. Only wo announcemens exraced some response; a marke calming effec from worse han expeced UE daa and a marke exciing effec from overall CPI daa announcemen. In sum, evidence suggess ha he U.S. informaion releases, in general, had a significan influence on marke reurns in Japan, Hong Kong and Singapore, and he level of marke volailiy was also significanly affeced in Ausralia, Japan and Hong Kong. Furhermore, here is evidence of asymmeric responses o good and bad news announcemens, and his suggess ha marke paricipans paid aenion o he ypes of announcemens made raher han o he simple ac of releasing informaion when hey responded o news. Japanese informaion releases The impac of he Japanese informaion releases are repored in Table 6. The Ausralian marke reurns were no affeced a all by he six Japanese informaion releases. This is somewha unexpeced considering he imporance of Japan as a rading parner for Ausralia (second only o he U.S. in erms of he size of rade) and he Japanese economic condiions have a direc bearing on Ausralia. The overall news impac on he volailiy was also absen. However, beer han expeced economic daa had a significan influence in four ou of six cases. Beer han expeced TB daa reduced he Ausralian marke volailiy whereas worse han expeced announcemens increased i. The combinaion of some significance in he condiional volailiy and absence of influence in he reurns migh indicae ha he Japanese informaion releases did no have a direc influence on he 17

19 Ausralian marke, bu hey provided some (limied) informaion regarding he regional marke condiions. Surprisingly, he Japanese marke reurns showed lile response o domesic informaion releases. Only one ou of six announcemens, bad CPI daa, exraced some response. There is, however, more evidence of influence on he condiional volailiy. Excep for he UE daa, all (overall) announcemens caused significan volailiy responses, and hey are mosly driven by bad daa announcemens ha raised he volailiy. The Hong Kong marke reurns were more responsive o he Japanese announcemens. Overall money supply and WPI inflaion daa helped o shore up suppor for he Hong Kong marke, and he good news announcemens were responsible for his. Worse han expeced performances in CAB and UE dampened he reurns, alhough he overall effecs of hese announcemens are insignifican. Srong impac on he condiional volailiy is also observed. The TB and CPI inflaion helped o significanly lower he marke volailiy while he ohers raised i. In all cases, he good news announcemens are responsible for he overall significance suggesing good news from Japan conains more informaion han bad ones. Three Japanese announcemens had a significan impac on he Singaporean marke reurns. Worse han expeced and overall CAB daa depressed reurns whereas good UE daa helped o simulae aciviies. In addiion, a posiive effec of overall CPI daa announcemen is deeced. On he condiional volailiy side of he esimaion, TB, and CPI daa had significan marke calming effec. Alhough here is significan marke exciing effecs of he announcemens of worse han expeced daa for he former, he marke calming effecs of he beer han expeced daa releases more han offse his leading o a fall in he condiional volailiy overall. Ineresingly, boh good and bad news CPI announcemens reduced marke volailiy suggesing ha he CPI inflaion daa, regardless of wheher good or bad, provided 18

20 enough informaion o reduce he level of uncerainy in he Singaporean marke. On he oher hand, he WPI daa, in general, conribued o marke uncerainy overall. In addiion, good UE daa and bad MS daa releases are associaed wih marke exciing and calming effecs, respecively. The U.S. marke responses o he Japanese daa are also selecive. Alhough here are significan asymmeric effecs shown, only he TB news on he whole was able o have an effec on U.S. marke reurns. I is of ineres o noe ha good, no bad, announcemens had a significan negaive effec ha migh be due o a posiive correlaion beween he U.S. rade defici and he Japanese rade surplus. The U.S. reurns were also dampened following good unemploymen daa and higher han expeced money supply growh, while higher han expeced WPI daa simulaed he U.S. marke. The condiional volailiy of he U.S. reurns also responded o he Japanese daa. Excep for he CAB and overall CPI daa, oher significan news evens raised he level of volailiy. In general, good news announcemens had bigger impac han he bad news ones. In sum, some of he Japanese informaion releases had a significan influence on he marke reurns of Hong Kong, Singapore and he U.S.. In general, he markes made disincive responses o each ype of news (good or bad). Similarly, disaggregaed effecs are found for he marke volailiy responses o he Japanese informaion releases. In paricular, i is observed ha he CPI daa, in general, helped o lower he marke volailiy in mos of he markes while he WPI inflaion daa had he opposie effec. This would indicae ha he Japanese consumer inflaion figures, in general, were likely o provide clearer informaion regarding he direcion of he Japanese economy, whereas he wholesale inflaion daa added o he level of uncerainy in he Japanese marke which subsequenly would have an adverse 19

21 impac on he oher markes ha were increasingly being linked o he Japanese marke. Ineresingly, his is opposie o wha is observed for he U.S. PPI and CPI inflaion daa where he former led o a general marke calming effec on he Asia-Pacific markes while he laer conribued o he marke volailiy in he region. We conjecure ha he U.S. and Japan s rade relaionships wih he res of he counries in he region is a possible explanaion for his. The U.S. represens a significan expor marke for mos of he counries in he Asia-Pacific region and so he CPI daa is likely o be wached very carefully due o price compeiiveness implicaions for heir expors, whereas, he Japanese WPI daa would have a direc bearing on he cos of impors o he counries in he region. Thus, announcemens of hese daa would simulae he marke rading aciviies leading o a higher level of marke volailiy. 4. Conclusions This paper invesigaed he naure of informaion leadership of he U.S. and he Japanese sock markes in advanced Asia-Pacific markes of Ausralian, Hong Kong and Singapore. Overnigh marke reurns in he Asia-Pacific markes followed he lead from he previous day s U.S. marke movemens, and he previous day s U.S. inradaily marke volailiy had a significan desabilizing effec in all cases excep for Ausralia where marke calming effec was observed. The Japanese marke movemens, on he oher hand, had only a limied impac. The Japanese influence is found in Ausralia, Singapore and he U.S. in erms of he reurns spillover, while only Japan and Singapore show evidence of significan volailiy ransfer. This confirms he informaional leadership role of he U.S. marke in he Asia-Pacific markes ha is more pronounced han ha of Japan. 20

22 Public informaion releases from he U.S. and Japan are also found o have significan informaional conens. The overnigh informaion releases in he U.S. had heir bigges impac in affecing he marke reurns in Singapore where five ou of six announcemens elicied significan responses. The overnigh reurns in Japan and Hong Kong were also significanly affeced by he U.S. daa releases. Surprisingly, he U.S. and Ausralian marke reurns, in general, remained unaffeced. The impac of he public informaion releases on he marke volailiy, however, is more pronounced. The condiional volailiy of overnigh marke reurns in Ausralia, Japan and Hong Kong were significanly influenced by he U.S. informaion releases. In general, higher condiional variances are observed indicaing ha he overnigh informaion arrival from he U.S. added o he level of uncerainy in hese markes. There is also some evidence of asymmeric impac of he announcemens of beer or worse han expeced figures. The abiliy of he Japanese daa o have an impac on he marke reurns in he region is no shown o be srong. Only wo ou of six announcemens drew some response in Hong Kong and Singapore, while oher markes including he Japanese marke iself did no, in general, respond o hem. However, significan announcemen effecs are found in he condiional variances of all counries excep for Ausralia whose marke responses were confined o beer han expeced economic announcemens only. In sum, alhough here is evidence of Japanese influence in he form of mean and volailiy spillovers and he impacs of public informaion releases on he marke volailiy in he region, he U.S. marke informaion leadership is found o be sronger in he Advanced Asia-Pacific sock markes. 21

23 References Arshanapall B. and J. Doukas, 1993, Inernaional sock marke linkages: Evidence from he pre- and pos-ocober 1987 period, Journal of Banking and Finance 17, Arshanapall B., J. Doukas and L. Lang, 1995, Pre and pos-ocober 1987 sock marke linkages beween U.S. and Asian markes, Pacific Basin Finance Journal 3, Becker, K. G., J. E. Finnery and J. Friedman, 1995, Economic news and equiy marke linkages beween he US and UK, Journal of Banking and Finance 19, Becker, K. G., J. E. Finnery and K. J. Kopecky, 1995, Domesic macroeconomic news and foreign ineres raes, Journal of Inernaional Money and Finance 14, Bollerslev, T., R. Y. Chou and K. F. Croner, 1992, ARCH Modelling in Finance: A Review of he heory and Empirical Evidence, Journal of Economerics 52, Cha, B. and Y.-L. Cheung, 1998, The impac of he U.S. and he Japanese equiy markes on he emerging Asia-Pacific equiy markes, Asia-Pacific Financial Markes 5, Chow, H.-K., 1999, Co-Movemen in Asian sock indices and he impac of he Asian financial crisis, PACAP Conference, July 1999, Singapore. Garman, M. and M. Klass, 1980, On he esimaion of securiy price volailiies from hisorical daa, Journal of Business 53,

24 Ghosh, A., R. Saidi and K. H. Johnson, 1999, Who moves he Asia-Pacific sock markes - US or Japan? Empirical evidence based on he heory of coinegraion, The Financial Review 34, Hamao, Y. R., R. W. Masulis and V. K. Ng, 1990, Correlaions in price changes and volailiy across inernaional sock markes, The Review of Financial Sudies 3, Janakiramanan, S. and A. Lamba, 1998, An empirical examinaion of linkages beween Pacific-Basin sock markes, Journal of Inernaional Financial Markes, Insiuions and Money 8, Kim, S.-J., 1998, Do Ausralian and he US macro economic news announcemens affec he USD/AUD exchange rae? Some Evidence from EGARCH esimaions, Journal of Mulinaional Financial Managemen 8, Kim, S.-J. and J. Sheen, 2000, Inernaional linkages and macroeconomic news effecs on ineres rae volailiy - Ausralia and he US, Pacific Basin Finance Journal 8, Koumos, G. and G. Booh, 1995, Asymmeric volailiy ransmission in inernaional sock markes, Journal of Inernaional Money and Finance 14,

25 Liu, Y. A. and M.-S. Pan, 1997, Mean and volailiy spillover effecs in he U.S. and Pacific- Basin sock markes, Mulinaional Finance Journal 1, Ng, A., 2000, Volailiy spillover effecs from Japan and he US o he Pacific-Basin, Journal of Inernaional Money and Finance 19, Pan, M.-S., Y. A. Liu and H. J. Roh, 1999, Common sochasic rends and volailiy in Asian-Pacific equiy markes, Global Finance Journal 10, Phylakis, K., 1997, Capial marke inegraion in he Pacific Basin region: An analysis of real ineres rae linkages, Pacific Basin Finance Journal 5, Phylakis, K., 1999, Capial marke inegraion in he Pacific Basin region: An impulse response analysis, Journal of Inernaional Money and Finance 18, Theodossiou, P. and U. Lee, 1993, Mean and volailiy spillovers across major naional sock markes: furher empirical evidence, Journal of Financial Research 16,

26 Figure 1:Trading hours and Times for Informaion releases JAPAN: CAB, TB, MS, WPI (23:50 GMT, 08:50 TT) JAPAN: CPI, UE (01:30 GMT, 10:30 TT) GMT Time Line Ausralia (GMT+10) Japan (GMT+9) 10:00 16:00 09:00 11:00 12:30 15:00 U.S.: All Releases 13:30 GMT, 08:30 EST Hong Kong (GMT+8) Singapore (GMT+8) 10:00 12:30 14:30 15:30 09:00 12:30 14:00 16:00 U.S. (EST:GMT-5) 09:30 16:00 25

27 Table 1: Summary of scheduled informaion releases from he U.S. and Japan. Balance of Paymen (BOT) Gross Domesic Produc (GDP) Unemploymen Rae (UE) Reail Sales Growh (RET) Consumer Price Index (CPI) Producer Price Index (PPI) Trade Balance (TB) Curren Accoun Balance (CAB) Unemploymen Rae (UE) Money Supply Growh (MS) Wholesale Price Index (WPI) Consumer Price Index (CPI) Frequency of Announcemens Monhly Quarerly Monhly Monhly Monhly Monhly Monhly Monhly Monhly Monhly Monhly Monhly Source: Acual and MMS expeced Money Marke Services Inernaional Money Marke Services Inernaional announcemen figures Uni of Measuremen Announcemen Time Daa Period $ US billion % change in GDP from previous quarer Unemploymen Rae, % % change of gross reail sales from previous monh % change in CPI from previous monh % change in PPI from previous monh Yen billion Jan-99 o Mar- 99 Yen billion Nov-93 o Mar-99 Unemploymen Rae, % May-94 o Mar-99 % change in M3 from previous monh Jan-91 o Apr- 99 % change in WPI from previous monh Apr-91 o Apr-99 % change in CPI from previous monh Toal Number of Announcemens wihin Daa Period No. (% of oal) of good announcemens (a) 43 (43%) 22 (65%) 45 (45%) 35 (39%) 42 (42%) 44 (51%) 46 (46%) 24 (43%) 15 (25%) 47 (47%) 49 (51%) 45 (46%) No. (% of oal) of bad announcemens (b) 57 (57%) 12 (35%) 56 (55%) 54 (61%) 57 (58%) 442 (49%) 53 (53%) 45( 57%) 45 (75%) 52( 52%) 47 (49%) 53 (54%) Tes of unbiased expecaions (c) 1.02 (0.38) 1.01 (0.75) 0.99 (0.57) 0.94 (0.33) 0.97 (0.4) 0.92 (0.4) 0.94 (0.35) 0.95 (0.44) 1.02 (0.69) 0.96 (0.13) 0.99 (0.66) 0.95 (0.06) (c)the unbiasedness is esed via Acual = a + b Expeced + e. 'b' is repored wih he p-value of he hypohesis of a=0 and b=1 in he bracke. U.S. See Figure 1 January 1991 o May 1999 See Figure 1 (a) (b) Good announcemens are beer han expeced announcemens of economic aciviy variables and lower han expeced inflaion variabales (CPI, WPI and PPI) and unemploymen rae. Japan Jan-91 o Mar-99 26

28 Table 2: Saisical properies of overnigh and daily sock marke index reurns Ausralia Japan HK Summary Saisics Singapore Overnigh (a) Daily (b) Overnigh Daily Overnigh Daily Overnigh Daily Overnigh Daily Mean Variance Skewness Excess Kurosis Tes of Univariae iid (c) Q(20) : χ 2 (20) ** ** ** ** ** ** ** * {0.0003} {0.1267} {0.0009} {0.0699} {0.0000} {0.0003} {0.0000} {0.0000} {0.0000} {0.0455} Q 2 (20): χ 2 (20) * ** ** ** ** ** ** ** ** ** {0.0268} {0.0000} {0.0000} {0.0000} {0.0000} {0.0000} {0.0000} {0.0000} {0.0000} {0.0000} E-N: χ 2 (3) ** ** ** ** ** ** ** ** ** ** {0.0000} {0.0000} {0.0000} {0.0000} {0.0000} {0.0000} {0.0000} {0.0000} {0.0080} {0.0000} U.S. Sock marke indexes are All ordinaries, Nikkei 225, Hang Seng, Sreigh Times, and Dow Jones (a) Ln(Open /Close -1 )*100 (b) Ln(Close /Close -1 )*100 (c) Box-Pierce Q-es of serial whie nosie for linear and non-linear (squared) reurns. E-N is Engle and Ng's join sign bias es. 27

29 Table 3: Mean and volailiy spill over effecs from he U.S. sock marke q 1 / 2 = c + α i, Mon Mon + α i, dus RUS, 1 + α hh + α kε i, k k = 1 R α, ε i, 1 i, 1 2 US ln hi, c ln h ε = β β ε1 + β ε 2 + β Mon Mon + β USvolVol 1 h 1 h π 1 R = The percenage reurns of sock indexes measured around he U.S. informaion releases, MON = Monday dummy, h = US Condiional volailiy of sock marke reurns for counry i a ime., Vol 1 = A Garman-Klass measure of inraday price volailiy of he U.S. sock marke a day -1. Ausralia Japan Hong Kong Singapore U.S. Coeff p-value Coeff p-value Coeff p-value Coeff p-value Coeff p-value α c ** * ** ** α mon * α h ** ** ** α dus ** ** ** ** ** β C ** ** ** ** ** β ε ** β ε ** ** ** ** ** β h ** ** ** ** ** β mon ** ** ** β USVOL ** ** ** ** ** q LogL Diagnosics for Sandardised Residuals, Z Skewness Excess Kurosis Q(20) : χ 2 (20) {0.1619} {0.0803} {0.7274} {0.6394} {0.1285} Q 2 (20): χ 2 (20) {0.2342} {0.5750} {0.3551} {1.0000} {0.9958} E-N: χ 2 (3) {0.6409} {0.6149} {0.3676} {0.4481} {0.6753} *, **: Significance a 5 and 1%, respecively 28

30 Table 4: Mean and volailiy spill over effecs from he Japanese sock marke q 1/ 2 R = α c + α Mon Mon + α djp RJP, 1 + α hh + α kε, ε ε J k i, 1 i, 1 2 ln = β c + ln h 1 + β ε1 + β ε 2 + β Mon Mon + β JPvolVol k = 1 h 1 h π 1 R = The percenage reurns of sock indexes measured around he Japanese informaion releases, MON = Monday dummy, h JP = Condiional volailiy of sock marke reurns for counry i a ime., Vol 1 = A Garman-Klass measure of inraday price volailiy of he Japanese sock marke a day -1. h 1 Ausralia Japan Hong Kong Singapore U.S. Coeff p-value Coeff p-value Coeff p-value Coeff p-value Coeff p-value α c ** α mon * ** ** ** α h ** ** α djp ** * ** β C ** ** ** ** ** β ε ** ** ** ** * β ε ** ** ** ** ** β h ** ** ** ** ** β mon ** ** ** ** ** β JPVol ** ** q LogL Diagnosics for Sandardised Residuals, Z Skewness Excess Kurosis Q(20) : χ 2 (20) {0.1502} {0.7592} {0.5721} {0.1241} {0.1903} Q 2 (20): χ 2 (20) {0.9371} {0.8418} {1.0000} {0.8577} {0.9999} E-N: χ 2 (3) {0.3468} {0.8482} {0.2926} {0.1909} {0.2783} *, **: Significance a 5 and 1%, respecively 29