Intertemporal volatility and price interactions between Australian and Japanese spot and futures stock index markets

Previous studies have examined causality within and between different spot and futures markets with a motivation to discover market comovements, price leadership effects, and, more recently, volatility spillovers across marke ts. However, the empirical framework within which this is accomplished tend s not to analyze explicitly foreign spillover effects upon a spot-futures r elationship, which may significantly alter the equilibrium between these ma rkets. This will then have a direct impact upon the estimation of dynamic r isk adjustments that occur from the interaction between these markets. This article develops a quadvariate simultaneous-equation EC-ARCH model with an emphasis on volatility spillovers as a better alternative methodology to e valuate these relationships from a different perspective. This model is app lied to examine the interaction between the Australian and Japanese spot an d futures stock index markets, which allows for an Australian or Japanese f utures trader to analyze the impact of foreign cash and futures markets, as well as the local cash market, on the local futures market in a single coh erent framework. This type of analysis is not possible using previous parad igms, because they allow the trader only to examine the impact of local cas h and foreign futures marl;ets in separate settings. (C) 1999 John Wiley & Sons, Inc.