Abstract
In this study, we provide some evidence of Granger-causal transmission of information to the correlation between large- and small-cap stock indexes in the UK. We employ the bivariate Logistic Exponential Generalized Autoregressive Conditional Heteroscedasticity (LEGARCH) specification proposed by Darbar and Deb [Darbar, S. M., & Deb, P. (1999).
Linkages among asset markets in the United States—tests in a bivariate GARCH framework. IMF Working Paper WP/99/158; Darbar, S. M., & Deb, P. (2000).
Transmission of information and cross-market correlations. Indiana University–Purdue University Indianapolis Working Paper.] and document correlation persistence, and a two-way information flow. More specifically, information to the large-cap stock index positively affects its next period correlation with the small-cap index, whereas information to the small-cap index negatively affects its next period correlation with the large-cap index. We also find evidence supporting the presence of both a January effect and an April effect in both small-cap and large-cap returns.