Information Processing and Measures of Integration: New York, London and Tokyo

UTS Quantitative Finance Research Paper No. 177

45 Pages Posted: 26 May 2006

See all articles by George Milunovich

George Milunovich

Macquarie University - Department of Economics; Macquarie University, Macquarie Business School

Susan Thorp

The University of Sydney Business School

Date Written: May 2006

Abstract

Equity markets do not pass all overnight information into prices instantaneously at the opening of trade. The New York market takes up to 30 minutes after the opening time to absorb overnight foreign news, Tokyo takes about 90 minutes, and London about 120 minutes on average. These delays in information absorption are not commercially significant but do have implications for measures of market integration. We adjust intra-daily return series for non-instantaneous news absorption and then use adjusted series to predict opening price variation in three major equity markets. Because the adjusted daytime returns series are uncorrelated, we can accurately measure the size, and identify the sources, of transmissions. Overnight news, as represented by foreign daytime returns, explains 12% of opening price variation (close-open returns) in New York, 14% in Tokyo and 30% in London. For New York 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 asymmetry effects.

Keywords: GARCH, spillover, integration, transmission, efficiency

JEL Classification: G14, G15

Suggested Citation

Milunovich, George and Thorp, Susan, Information Processing and Measures of Integration: New York, London and Tokyo (May 2006). UTS Quantitative Finance Research Paper No. 177, Available at SSRN: https://ssrn.com/abstract=904531 or http://dx.doi.org/10.2139/ssrn.904531

George Milunovich

Macquarie University - Department of Economics ( email )

Sydney NSW 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Susan Thorp (Contact Author)

The University of Sydney Business School ( email )

Abercrombie Building
H70
The University Of Sydney, NSW 2006
Australia
0290366354 (Phone)

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