Abstract
This article examines the intraday returns and liquidity patterns of the Standard & Poor’s Depositary Receipts (SPY) and the iShares Morgan Stanley Capital International Inc. (MSCI) Japan Index Fund (EWJ). These exchange-traded funds seemingly have very different holdings, namely, US stocks and Japanese stocks. Our findings suggest that some commonality exists in the returns and liquidity of these apparently different assets. First, there are intraday, daily and monthly patterns in the measures of liquidity for both funds. Second, the measures of liquidity are correlated across these two assets. Third, there is evidence of intraday spillover in the mean, volatility and depth from the SPY to the EWJ, but daily spillover is not observed. Our study extends two evolving strands of the literature: the integration of world markets in terms of returns behavior, and the other strand suggests that liquidity may have a systematic, or market-wide, component. This paper provides direct evidence of the integration between the US and Japanese markets because contemporaneous trading prices for the US (SPY) and Japanese (EWJ) indices are employed.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Residuals from adjustment regressions were used for VAR tests as dependent variables because they are purged of seasonality effects.
According to Lindley (1957), lower significance levels should be required for large samples, otherwise spurious significance results may be obtained due to a large sample. In the literature, this is known as Lindley’s paradox.
References
Amihud Y, Mendelson H (1980) Dealership market: market making with inventory. J Financial Econ 8:31–53
Amihud Y, Mendelson H (1986) Asset pricing and the bid-ask spread. J Financial Econ 17:223–249
Avromov D, Chordia T, Goyal A (2006), Liquidity and Autocorrelations in Individual Stock Returns. J Finance 61:2365–2394
Bodurtha J, Kim D-S, Lee C (1995) Closed-end country funds and U.S. market sentiment. Rev Financial Stud 8:879–918
Booth G, Chowdhury M, Martikainen T, Tse Y (1997) Intraday volatility in international stock index futures markets: meteor showers or heat waves? Manage Sci 43:1564–1576
Brockman P, Chung DY (2003) The inter-temporal behavior of informed and uninformed traders. Rev Quant Finance Account 21:251–265
Campbell J, Hamao Y (1992) Predictable stock returns in the United States and Japan: A study of long-term capital market integration. J Finance 47:43–69
Chan K, Hameed A, Lau S-T (2003) What if trading location is different from business location? Evidence from the Jardine group. J Finance 53:1221–1246
Chan K, Karolyi GA, Stulz R (1992) Global financial markets and the risk premium on U.S. equity. J Financial Econ 32:137–167
Chordia T, Roll R, Subrahmanyam A (2000) Commonality in liquidity. J Financial Econ 56:3–28
Chordia T, Roll R, Subrahmanyam A (2001) Market liquidity and trading activity. J Finance 56:501–530
Chordia T, Roll R, Subrahmanyam A (2002) Order imbalance, liquidity, and market returns. J Financial Econ 65:111–130
Chordia T, Sarkar A, Subrahmanyam A (2005) An empirical analysis of stock and bond market liquidity. Rev Financial Stud 18:85–129
Chordia T, Roll R, Subrahmanyam A (2005) Evidence on the speed of convergence to market efficiency. J Financial Econ 76:271–292
Craig A, Dravid A, Richardson M (1995) Market efficiency around the clock: Some supporting evidence using foreign-based derivatives. J Financial Econ 39:161–180
Froot K, Dabora E (1999) How are stock prices affected by the location of trade? J Financial Econ 53:189–216
Gallant A, Rossi P, Tauchen G (1992) Stock prices and volume. Rev Financial Stud 5:199–242
Glosten L, Milgrom P (1985) Bid, ask and transaction prices in a specialist market with heterogeneously informed traders. J Financial Econ 14:71–100
Grossman S, Miller M (1988) Liquidity and market structure. J Finance 43:617–633
Hamao Y, Masulis R, Ng V (1990) Correlations in price changes and volatility across international stock markets. Rev Financial Stud 3:281–308
Karagozoglu AK, Martell TF, Wang GHK (2003) The split of the S&P 500 futures contract: effects on liquidity and market dynamics. Rev Quant Finance Account 21:323–348
Lee B (1995) Common stochastic trends and predictability of international stock prices. J Japan Int Econ 9:245–277
Lee C, Radhakrishna B (2000) Inferring investor behavior: evidence from TORQ data. J Financial Market 3:83–111
Lee C, Ready M (1991) Inferring trade direction from intraday data. J Finance 46:733–747
Lin W, Engle R, Ito T (1994) Do bulls and bears move across borders? International transmission of stock returns and volatility. Rev Financial Stud 7:507–538
Lindley DV (1957) A statistical paradox. Biometrika 44:187–192
Melvin M, Melvin B (2003), Global transmission of volatility in the foreign exchange market. Rev Econ Stat 85:670–679
Odders-White E (2000) On the occurrence and consequences of inaccurate trade classification. J Financial Market 3:205–332
Olienyk J, Schwebach R, Zumwalt J (1999) WEBS, SPDRs, and country funds: an analysis if international cointegration. J Multinational Financial Manage 9:217–232
Pennathur A, Delcours N, Anderson D (2002) Diversification benefits of iShares and closed-end country funds. J Financial Res 25:541–557
Tse Y, Hackard JC (2004) Can Island provide liquidity and price discovery in the dark?. Rev Quant Finance Account 23:149–166
White H (1980) A heteroscedasticity-consistent covariance matrix estimator and a direct test for heteroscedasticity. Econometrica 48:149–170
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Datar, V., So, R.W. & Tse, Y. Liquidity commonality and spillover in the US and Japanese markets: an intraday analysis using exchange-traded funds. Rev Quant Finan Acc 31, 379–393 (2008). https://doi.org/10.1007/s11156-008-0084-9
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11156-008-0084-9