Return and volatility spillover between large and small stocks in Bursa Malaysia
Wei-Chong Choo, Sin-Chun Loo, Leh-Bin Ling, Sze-Nie Ung

Abstract
The main concern for asset allocation is that if any return and volatility from a stock market spillovers into, return and volatility of another market. This paper investigates the existence of spillover effect in Malaysian market. Specifically, we study the return and volatility spillover effects between Bursa Malaysia Composite Index (KLCI) and Bursa Malaysia Second Board Index. Multivariate GARCH model has been employed in our study. We reveal that return transmission mechanisms between large and small stocks in Bursa Malaysia are reciprocal, where both types of stocks have significant spillover effects on each other; particularly during and after Asian financial crisis. On the other hand, volatility of large stocks has much more impact on volatility of small stocks. The dominance effect of large stocks in Malaysian market indicates that information is first incorporated into prices of larger stocks before being explicitly embedded into prices of smaller stocks. Hence, these stocks are interrelated and the spillover effect should be taken into consideration during investing in Malaysian market.

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