Spot–Futures Price Adjustments in the Nikkei 225: Linear or Smooth Transition? Financial Centre Leadership or Home Bias?

Abstract

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.

Price Discovery and Market Efficiency in India's Financial Futures Market within the Derivatives Landscape: An Empirical Analysis

“…In a comparative stance, Hou et al (2019) 24 27 illustrate the smooth transition error correction behaviour in Nikkei 225 futures price discovery along with the EGARCH approach, suggesting non-linear dynamics, while Garg et al (2023) 28 underscore the spot market's dominance in Indian agricultural commodity price discovery and employ bivariate GARCH models. Chen and Tongurai (2023) 29 evaluate the impact of the US-China trade conflict on the flow of information between China's futures and spot markets.…”

“…Khan et al (2022)26 explore the intraday dynamics of India's Nifty 50 futures and spot markets, and they find two-way volatility spillovers with futures having a greater impact. They use the Baba, Engle, Kraft, and Kroner (BEKK) -Generalized Autoregressive Conditional Heteroskedasticity (GARCH) also known as BEK-GARCH model, Granger causality tests, common factor weights, and Hasbrouck's IS to support their findings Qin et al (2023).…”