Empirical Research on Information Transmission in the Hang Seng Index Markets: Evidence from Index Futures, Flagship Index and Finance Index

Abstract: This paper investigates the price discovery mechanism in the Hang Seng Index markets. The analysis is based on the cross-market volatility spillover effects by using the daily sets of Hang Seng Index (HSI), Hang Seng Finance Index (HSFIN), and Hang Seng Index futures (HSCIS00). In order to testify the influence of 2007 financial tsunami on the volatility spillover effect, the study employs the vector autoregressive model (VAR) and the bivariate GARCH model based on the BEKK parameterization. The testing period has been divided into the pre-crisis (1 April, 2003 to 31 July, 2007) and the crisis & recovery period (1 August, 2007 to 1 April, 2013). The empirical results depict that there exists bi-directional volatility spillover effect between HSI and HSCIS00 for the whole testing period. In contrast, a strong bi-directional volatility spillover effect between HSFIN and HSCIS00 is only recognized after the outbreak of the 2007 financial crisis.