Liquidity commonality and spillover in the US and Japanese markets: an intraday analysis using exchange-traded funds

• Published in: Review of quantitative finance and accounting Vol. 31; no. 4; pp. 379 - 393
• Main Authors: Datar, Vinay, So, Raymond W., Tse, Yiuman
• Format: Journal Article
• Language: English
• Published: Boston Springer US 01-11-2008; Springer Nature B.V
• Subjects: Accounting procedures; Accounting/Auditing; Corporate Finance; Econometrics; Economics and Finance; Exchange traded funds; Finance; Index funds; Liquidity; Mathematical models; Operations Research/Decision Theory; Original Research; Statistical analysis; Stock exchanges; Studies; Volatility; United States > US; Japan; Commonality; G15; Intraday liquidity; G14; Exchange traded funds
• ISSN: 0924-865X; 1573-7179
• DOI: 10.1007/s11156-008-0084-9

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.