Lead‐lag relationship, volatility asymmetry, and overreaction phenomenon

Abstract

PurposeThe purpose of the paper is to investigate the price interrelationship between the Taiwanese and US financial markets.Design/methodology/approachThe trivariate GJR‐GARCH (1,1) model and event study were employed to investigate volatility asymmetry and overreaction phenomenon, respectively.FindingsThe empirical results show that return volatility reveals the asymmetric phenomenon, and the holding period returns on US index futures from the opening of the US index futures electronic trading to the opening of the Taiwanese stock market are an important reference for investors in the Taiwanese stock market. Additionally, the paper presents an overreaction of the Taiwan Stock Exchange Capitalization Weighted Stock Index to a drastic price rise of E‐min NASDAQ 100 Index futures at the opening of the Taiwanese stock market.Research limitations/implicationsThis paper deletes the observations arising from the different national holidays of the USA and Taiwan, to have the same number of observations in both markets, which might contaminate the empirical results.Practical implicationsInvestors in the Taiwanese stock market tend to pay more attention to the fluctuations in the share prices of high‐technological companies in the USA.Originality/valueMost of the previous studies regarding price transmission between the Taiwanese and US stock markets focused mainly on the Taiwanese market reactions to the overnight returns of the US market. This paper enlarges the current field by examining the lead‐lag relationship, the volatility asymmetry, and the overreaction phenomenon between the Taiwanese and US financial markets according to the most updated US stock index information.