Spot-futures price adjustments in the Nikkei 225: linear or smooth transition? Financial centre leadership or home bias?

This paper studies price discovery in Nikkei 225 markets through the nonlinear smooth transition price adjustments between spot and future prices and across all three futures markets. We test for smooth transition nonlinearity and employ an exponential smooth transition error correction model (ESTEC...

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Bibliographic Details
Published in:Journal of risk and financial management 2023-01, Vol.16 (2), p.1-31
Main Authors: Qin, Jieye, Green, Christopher J, Sirichand, Kavita
Format: Article
Language:English
Subjects:
Analysis
Arbitrage
Asymmetry
Bias
Commodities industry
Costs
Efficiency
Error correction & detection
Futures
Futures market
Futures trading
Hypotheses
Information management
information transmission
International finance
Leadership
Nikkei 225 futures
price adjustment
price discovery
Securities industry
smooth transition
Spot market
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Summary:This paper studies price discovery in Nikkei 225 markets through the nonlinear smooth transition price adjustments between spot and future prices and across all three futures markets. We test for smooth transition nonlinearity and employ an exponential smooth transition error correction model (ESTECM) with exponential generalised autoregressive conditional heteroscedasticity (EGARCH), allowing for the effects of transaction costs, heterogeneity, and asymmetry in Nikkei price adjustments. We show that the ESTECM-EGARCH is the appropriate model as it offers new insights into Nikkei price dynamics and information transmission across international markets. For spot-futures price dynamics, we find that futures led spot prices before the crisis, but spot prices led afterwards. This can be explained by the lower level of heterogeneity in the underlying spot transaction costs after the crisis. For cross-border futures prices, the foreign exchanges (Chicago and Singapore) lead in price discovery, which can be attributed to their roles as global information centres and their flexible trading conditions, such as a more heterogeneous structure of transaction costs. The foreign leadership is robust to the use of linear or nonlinear models, the time differences between Chicago and the other markets, and the long-run liquidity conditions of the Nikkei futures markets, and strongly supports the international centre hypothesis.
ISSN:1911-8074
1911-8066
1911-8074
DOI:10.3390/jrfm16020117