Japanese Stock Markets and the US Stock Price Index Ratios

This paper investigates which US stock price index is strongly influenced by the Japanese stock markets. Our empirical tests as to the time-varying correlations derived from a multivariate generalized autoregressive conditional heteroskedasticity (MGARCH) model reveal the following evidence. First, (1) we clarify that all US stock returns of the Dow Jones, S&P 500, and NASDAQ Composite indices are statistically significantly positively influenced by the returns of TOPIX and the Nikkei 225. Moreover, we also find that (2) the changes of the NASDAQ-S&P 500 (NS) ratio are statistically significantly positively influenced by the returns of TOPIX and the Nikkei 225 while the changes of the Dow Jones-S&P 500 (DS) ratio and the Dow Jones-NASDAQ (DN) ratio are statistically significantly negatively influenced by the returns of TOPIX and the Nikkei 225. These relations between the returns of TOPIX and the Nikkei 225 and the US stock price index ratios are clearly shown in all three sample periods employed in this paper. Hence our results suggest that, in our analyzing periods, (3) the NASDAQ index is most strongly positively connected with the Japanese stock markets. JEL Classification Codes: G12, G15