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Revisiting The Financial Volatility–Derivative Products Relationship On Euronext.Liffe Using A Frequency Domain Analysis

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  • CLAUDIU TIBERIU ALBULESCU
  • Daniel Goyeau
  • AVIRAL KUMAR TIWARI

Abstract

ABSTRACT:The present paper analyses the relationship between the volume of transactions with futuresequity index products and the return volatility of their underlying assets. The study addressesthe case of five stock markets, members of the Euronext.liffe. We employ a frequency domainanalysis to identify the direction of the causality. In addition, we test the relationship betweenthe volume of futures contracts and both negative and positive shocks in terms of the historicalvolatility of index returns. Our results indicate the frequency causality only in the case ofBrussels financial market. For Lisbon, the causality is present, but it is not validated by theconfidence level tests, while for London, Paris and Amsterdam, no causality can be observed. Inthe case of Brussels, the causality is bidirectional, both in the short and long run frequencies.The futures equity index volume Granger-causes the positive shocks in terms of volatility in thelong run and the negative shocks in the short run.

Suggested Citation

  • CLAUDIU TIBERIU ALBULESCU & Daniel Goyeau & AVIRAL KUMAR TIWARI, 2013. "Revisiting The Financial Volatility–Derivative Products Relationship On Euronext.Liffe Using A Frequency Domain Analysis," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 56(3-4), pages 349-364.
    • Handle: RePEc:bxr:bxrceb:2013/174862
    Note: Special Issue30th Symposium on Money, Banking and FinanceGuest editors: Christian Aubin, Noëlle Duport andDaniel Goyeau
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    More about this item

    Keywords

    Volatility; futures index products; frequency domain Granger causality; Euronext;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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