Information transmission between the NASDAQ and Asian second board markets

Abstract

In the 1980s and early 1990s, the NASDAQ's success helped to prompt Singapore (SESDAQ), Japan (JASDAQ), Taiwan (TAISDAQ), and South Korea (KOSDAQ) to set up or formalize their own second board markets. In 1999, Malaysia (MESDAQ) and Hong Kong (GEM) followed suit. 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 after controlling for spillovers from the NYSE, and whether these cross-country spillovers are strong relative to domestic spillovers from the corresponding main board markets. 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 continues until April 20, 2001. 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. There is also 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 are 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 US dollar-based data or local currency-based data. Given the difference in the trading hours between the NASDAQ and Asian stock markets, we use available intra-day return data and Canadian return data. The findings seem quite robust: there is substantial information spillover from the NASDAQ to the Asian and Canadian second board markets. These findings indicate the existence of a substantial cross-country industry effect (or meteor shower effect), as well as a domestic market effect (or heat wave effect), and imply that both country diversification and industry diversification are important.