G. Geoffrey Booth

Asymmetric volatility transmission in international stock markets

Abstract The transmission mechanism of price and volatility spillovers across the New York, Tokyo and London stock markets is investigated. The asymmetric impact of good news (market advances) and bad news (market declines) on volatility transmission is described by an extended multivariate Exponential Generalized Autoregressive Conditionally Heteroskedastic (EGARCH) model. Using daily open-to-close returns, we find strong evidence that volatility spillovers in a given market are much more pronounced when the news arriving from the last market to trade is bad. A before and after October 1987 crash analysis reveals that the linkages and interactions among the three markets have increased substantially in the post-crash era, suggesting that national markets have grown more interdependent.

Price discovery and common factor models

Abstract If a financial asset is traded in more than one market, common factor models may be used to measure the contribution of these markets to the price discovery process. We examine the relationship between the Hasbrouck (J. Finance (50) (1995) 1175) and Gonzalo and Granger (J. Bus. Econ. Stat. 13 (1995) 27) common factor models. These two models complement each other and provide different views of the price discovery process between markets. The Gonzalo and Granger model focuses on the components of the common factor and the error correction process, while the Hasbrouck model considers each markets contribution to the variance of the innovations to the common factor. We show that the two models are directly related and provide similar results if the residuals are uncorrelated between markets. However, if substantive correlation exists, they typically provide different results. We illustrate these differences using analytic examples plus a real world example consisting of electronic communications networks (ECNs) and other Nasdaq market makers.

Price and volatility spillovers in Scandinavian stock markets

Abstract New evidence is provided on price and volatility spillovers among the Danish, Norwegian, Swedish, and Finnish stock markets. The impact of good news (market advances) and bad news (market retreats) is described by a multivariate Exponential Generalized Autoregressive Conditionally Heteroskedastic (EGARCH) model. Volatility transmission is asymmetric, spillovers being more pronounced for bad than good news. Significant price and volatility spillovers exist but they are few in number.

Price discovery in the German equity index derivatives markets

This article examines the intraday price discovery process among stock index, index futures, and index options in Germany using DAX index securities and intraday transactions data. The three index securities contribute to a common factor, but the spot index and index futures have substantially larger information shares than index options. Moreover, the returns of the three index securities exhibit feedback effects, with futures being dominant. Because the trading costs of the futures appear to be the lowest of the three and those of the options to be the highest, the results are consistent with the transaction cost hypothesis.

The Stable-Law Model of Stock Returns

This study investigates the tail shapes of empirical distributions of returns on an extensive group of common stocks. The tails of the return distributions are found to be thinner than those of infinite variance stable distributions. Therefore, although homogeneity is evident in general, economic and statistical inferences drawn from stable-law parameters estimated from samples of stock returns may be misleading. This is in spite of the apparent overall similarity (in shape) between empirical and stable distributions.

R/S analysis of foreign exchange rates under two international monetary regimes

Abstract The purpose of this study is to examine empirically the behavior of foreign exchange markets during the most recent experiences with fixed and flexible rates. Specifically, this study explores the possibility that long-term dependence is present in the exchange rate series for the British pound, French franc, and German mark in terms of the U.S. dollar. Using R/S analysis, positive long-term dependence is uncovered for each exchange rate during the flexible regime but negative dependence is found in the fixed period.

Mixed Diffusion-Jump Process Modeling of Exchange Rate Movements

This study demonstrates that the mixed diffusion-jump process is superior to the stable laws or a mixture of normals as a model of exchange rate changes for the British pound, French franc, and the We st German mark relative to the United States dollar. The parameter value s for the mixed diffusion-jump process are dependent on the monetary policy regime in force in the United States, with the estimates for the franc and mark being intertemporally similar but different from the pound. Copyright 1988 by MIT Press.

Long-run dynamics of black and official exchange rates

Abstract This paper examines the relationships among black and official foreign exchange rates. Its primary purpose is to investigate the way in which black and official markets process information. Application of cointegration tests to the Turkish markets for US dollars and West German marks in the mid 1980s indicates that the two black markets are efficient information processors. For the black and official markets of each currency, evidence is found suggesting the possibility of overshooting by the black exchange rate. This inefficiency may not be able to be arbitraged away because of restrictions on capital flows through official channels.

The relationship between US and Canadian wheat futures

The purpose of this paper is to investigate the relationship between US and Canadian wheat futures prices in order to analyse the degree of information spillover between the futures exchanges of both countries. Although considerable research has focused on the relationship between US and Canadian equity markets, little work has been conducted on their respective future markets. The increase in market-oriented trade agreements and the decrease of governmental presence in the agricultural sector adds to the importance and timeliness of such a study. The results show that both the US and Canadian wheat futures prices are an integrated series of order one, and that the two series are cointegrated. Although the evidence shows an equilibrium relationship in the long run, short-run dynamics exhibit no such dependencies. These results are relevant for various market participants, including farmers, grain merchants, speculators, exchanges, and regulatory agencies.

Stochastic modeling of security returns: Evidence from the Helsinki Stock Exchange

Abstract This paper documents the presence of linear and nonlinear dependencies in Finnish stock returns and models these dependencies using autoregressive conditional heteroscedastic methods. Three conditional distributions (normal, Student- t , and the power exponential) are explored. The statistical estimates and the corresponding diagnostic tests indicate that a GARCH (1, 1) model with a power exponential conditional distribution, which is characterized by an autoregressive mean, represents the data better than any of the other models examined.