Information Transmission between NASDAQ and Asian Second Board Markets

Abstract

In Asia, NASDAQ's success has helped prompt Singapore (SESDAQ), Japan (JASDAQ), Taiwan (TAISDAQ) and South Korea (KOSDAQ) to set up or formalize their own second board markets in the 1980s and early 1990s. In 1999, Malaysia (MESDAQ) and Hong Kong (GEM) also set up their second board markets. Given the growing importance of these second board markets, we examine whether there is any evidence of spillovers from NASDAQ returns and volatilities to Asian second board market returns and volatilities and whether the cross-country spillovers are strong relative to domestic spillovers from the corresponding main board markets. For this purpose, we employ EGARCH models, dynamic causality tests, and VAR-based forecast error decompositions using daily data of a recent sample period that includes the Asian financial crisis of 1997 and up to April 20, 2001. We find that, first, there is strong evidence of lagged returns and volatility spillovers from the NASDAQ market to the Asian second board markets when we exclude contemporaneous main board market returns. Second, there is strong evidence of contemporaneous and lagged returns and volatility spillovers from the local main board markets to the corresponding second board markets. However, even in the presence of contemporaneous main board market returns, there remain substantial spillovers from the lagged NASDAQ returns and volatilities to Asian second board market returns and volatilities. These findings are not sensitive to whether we use U.S. dollar-based data or local currency-based data. Given the difference in the trading hours between the NASDAQ and Asian stock markets, we attempt to alleviate this concern by using some available intra-day return data and Canadian return data. The findings seem quite robust: There is substantial information spillover from the NASDAQ to Asian and Canadian second board markets. These findings indicate the existence of substantial cross-country industry effect (or meteor shower effect) as well as domestic market effect (or heat wave effect) and imply that both country diversification and industry diversification are important.