When Nikkei Leads: Transfer Entropy Evidence of Persistent Japan-to-U.S. Equity Information Flow

Abstract

A widely held view in financial economics is that U.S. equity markets lead price discovery in international markets. We challenge this assumption using Kraskov–Stögbauer–Grassberger Transfer Entropy (KSG-TE) to measure directional information flow between the S&P500 (SPY) and the Nikkei225 (N225) across 2022–2024. Applying a sliding-window estimator to daily log returns, we find that N225 led SPY in 85.6% and 70.8% of 20-day windows in 2022 and 2023 respectively, and in all but one calendar month of 2024. This recurrent directional asymmetry is strongest at a 1-day lag and statistically significant in a pooled three-year surrogate test (z = −3.56, p = 0.002, N = 1,000 phase-randomized surrogates). A lag sweep shows the signal decays monotonically and vanishes at a 3-day delay (p = 0.49), consistent with information flow concentrated in the Tokyo-close to New-York-open window. Robustness checks confirm significance strengthens to p < 0.001 at k = 3, with asymmetry stable at −0.164 to −0.168nats across configurations. An alignment control demonstrates that the signal collapses to near-zero under temporal misalignment, ruling out distributional artifacts. The August 2024 global selloff is shown to be an intensification of a pre-existing directional regime, consistent with Bank of Japan monetary policy signaling through the yen carry trade channel. A comparative analysis with the DAX/SPY pair confirms that the Nikkei channel is stronger in magnitude and more lag-persistent, consistent with a Japan-specific structural driver.