Information Transmission and Price Dynamics between US and Asia Stock Markets

This thesis studies the information transmission and price dynamics among stock markets’movement between US and Asia markets (China and Japan). In particular, the structural change of the stock markets during 2008 financial crisis period has been analyzed in order to identify the lead-lag relationship between the US stock market and Asia markets. The results show that the co-movement is stronger after crisis. Although in the long run the US market leads Asian markets and the indices from those three countries have a common nonlinear long term trend for in both pre-crisis and post-crisis period, the analysis shows that China is beginning to play a more important role in the world economies and the international markets are becoming more closely linked after financial crisis. To gain insight into the co-movement, the role of exchange rate and stock indices has been examined, where the exchange rate can explain part of the dynamic relationship in the data. The international transmission of asset price movement would be adjusted by adding the exchange rate on stock prices. Various statistical methods have been utilized in this work, including Recursive Residuals and the Stock-Watson Test, VAR model and Granger-Causality Test, and co-integration analysis, etc. The results suggest possible unexploited arbitrage and profit opportunities in international portfolios. In addition, these findings can potentially help predict the 2015 Chinese stock market crash and its relationship with US markets.