Measuring equity market integration using uncorrelated information flows: Tokyo, London and New York

Elsevier Ltd
Publication Type:
Journal Article
Journal of Multinational Financial Management, 2007, 17 (4), pp. 275 - 289
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Equity markets do not pass all overnight information into prices instantly at the opening of trade. We adjust open-to-close return series for non-instantaneous information absorption and then use adjusted series to measure integration among three major equity markets. Because the adjusted daytime return series are uncorrelated, we can accurately measure the size, and identify the sources, of transmissions. Overnight news, as represented by foreign open-to-close returns, explains 13% of opening price variation (close-toopen returns) in NewYork, 14% in Tokyo and 30% in London. ForNewYork and Tokyo, the largest influences come from the market that trades immediately prior (London and New York respectively) whereas opening price variation in London is linked closer with New York than Tokyo. Foreign volatility spillovers are also significant, and subject to asymmetric effects.
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