Asymmetries, causality and correlation between FTSE100 spot and futures: A DCC-TGARCH-M analysis

Tao, J;Green, CJ

[Tao, Juan] Xian Jiaotong Liverpool Univ, Dept Business Econ & Management, Suzhou 215123, Jiangsu, Peoples R China.
[Green, Christopher J.] Univ Loughborough, Dept Econ, Loughborough LE11 3TU, Leics, England.

INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS

Volume:24 Pages:26-37

DOI:10.1016/j.irfa.2012.07.002

Publication Year:2012

ESI Discipline:ECONOMICS & BUSINESS

Latest Impact Factor:5.373

Document Type:Journal Article

Identifier:http://hdl.handle.net/20.500.12791/000735

Abstract

We use DCC-TGARCH-M to study asymmetries in the conditional variance in FTSE100 spot and futures returns before and after cost-reducing market microstructure changes on the London Stock Exchange and the London International Financial Futures Exchange. We find bidirectional causality-in-mean and that negative shocks have a larger impact on the conditional variances than positive shocks. There is little evidence of causality-invariance. The results support a risk premium explanation of asymmetric volatility before the microstructure changes; afterwards, there is evidence of a risk premium effect in futures but a momentum effect in spot. Following the microstructure changes, the speed at which the markets absorbed news increased, as did the asymmetric volatility effect of bad news. We also document regular temporary declines in the conditional correlations following contract expiration. This is consistent with the increased uncertainty following expiration, when investors' attention switches to the next near contract, and the no-arbitrage linkage between spot and futures is temporarily reduced. (C) 2012 Elsevier Inc. All rights reserved.

Keywords

Index futures Conditional correlation Causality CCF test DCC-TGARCH-M

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