This paper investigates why, in October 1987, almost all stock markets fell together despite widely differing economic circumstances. The idea is that "contagion" between markets occurs as the result of attempts by rational agents to infer information from price changes in other markets. This provides a channel through which a "mistake" in one market can be transmitted to other markets. Hourly stock price data from New York, Tokyo and London during an eight month period around the crash offer support for the contagion model. In addition, the magnitude of the contagion coefficients are found to increase with volatility.

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Transmission of Volatility between Stock Markets

This article investigates empirically how returns and volatilities of stock indices are correlated between the Tokyo and New York markets. Using intradaily data that define daytime and overnight returns for both markets, we find that Tokyo (New York) daytime returns are correlated with New York (Tokyo) overnight returns. We interpret this result as evidence that information revealed during the trading hours of one market has a global impact on the returns of the other market. In order to extract the global factor from the daytime returns of one market, we propose and estimate a signal-extraction model with GARCH processes. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Do Bulls and Bears Move Across Borders? International Transmission of Stock Returns and Volatility

https://cdn.preterhuman.net/texts/finance_and_marketing/stock_market/Goodhart%20And%20O'hara-High%20Frequency%20Data%20In%20Financial%20Markets%20Issues%20And%20Applications.pdf

High frequency data in financial markets: Issues and applications

Hourly volatility spillovers between international equity markets

We examine the effects of trading after hours on the amount and timing of price discovery over the 24-hour day. A high volume of liquidity trade facilitates price discovery. Thus prices are more efficient and more information is revealed per hour during the trading day than after hours. However, the low trading volume after hours generates significant, albeit inefficient, price discovery. Individual trades contain more information after hours than during the day. Because information asymmetry declines over the day, price changes are larger, reflect more private information, and are less noisy before the open than after the close. Technology has dramatically changed the way stock markets operate by allowing investors to trade directly with each other, both during and outside of exchange trading hours. Although it is now relatively easy to trade after hours, in reality most investors do not. Only 4% of Nasdaq trading volume occurs after hours. This article examines how investors’ decisions to trade after hours or during the trading day affect the process through which new information is incorporated into security prices. We find that relatively low after-hours trading volume can generate significant price discovery, although prices are noisier after hours, implying that the price discovery is less efficient. Variation in the amount of informed and uninformed trading is relatively small, both within the trading day [Admati and Pfleiderer (1988), Wood, McInish, and Ord (1985), Madhavan, Richardson, and Roomas (1997)] and across trading days [Foster and Viswanathan (1993)]. In contrast, there are large shifts in the trading process at the open and at the close. These large shifts make it possible to examine price discovery under conditions very different from those studied previously and allow us to address the following four questions regarding the relationship between trading and price discovery. First, how does the trading process affect the

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Price Discovery and Trading After Hours

After-hours pricing in foreign equity markets of multiple-listed U.S. securities appeared to be efficient in predicting New York prices in the weeks immediately following the October 1987 crash but relatively uninformative in succeeding months. By contrast, daily changes in New York prices appear to be efficiently incorporated in after-hours trading on both the Tokyo and London exchanges throughout the sample period. This paper suggests that the asymmetry and temporal variations in cross-market correlations are consistent with rational investor behavior in equity markets with nonzero transaction costs and time-varying share price volatility. IN THE WAKE OF the October 1987 crash, a number of studies have provided evidence of significant international linkages among national equity markets where high-frequency movements in the share price indices of national exchanges appear to induce sympathetic price movements in subsequent trading on other national exchanges.' However, the cross-market correlations are generally much larger in periods of extreme volatility and appear to subside to modest or even negligible associations during periods of more normal trading activity. Since the constituent stocks of national exchange indices are not identical, it may be that the episodic increases in correlated movements of the indices are due to changes in the actual (or perceived) relative importance of common factors in periods of unusual volatility. The thrust of this paper is to remove the issue of the disparate composition of the price indices of national exchanges by examining the prices of a set of

Suzanne Tosini

Papers

After‐Hours Stock Prices and Post‐Crash Hangovers

After-hours stock prices and post-crash hangovers