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This article investigates volatility transmission process between the US, the UK and Japanese stock index futures markets. Most importantly, we examine that whether structural changes have effect on volatility transmission process. We use Iterated Cumulative Sums of Squares (ICSS) algorithm proposed by Inclan and Tiao (1994) to identify time points of structural changes exiting in the financial time series. Our results show that there is no common structural change in variances for three futures returns. This implies that diversification across stock index futures markets is possible. We find that volatility in three stock index futures markets are directly affected by its own lagged volatility. There are asymmetric volatility transmission effects between Japan and the UK and Japan and the US. In addition, there are bidirectional cross market volatility transmission between the UK and the US. However, this relation does not hold after controlling for structural changes in the bivariate Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model. We find that the measure of volatility transmission differs in intensity from that otherwise estimated. These findings support that structural changes in variance and GARCH model misspecification influence information flow and hence the scheme of transmission.
