Asymmetries, causality and correlation between FTSE100 spot and futures: A DCC-TGARCH-M analysis
AbstractWe 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-in-variance. 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.
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Bibliographic InfoArticle provided by Elsevier in its journal International Review of Financial Analysis.
Volume (Year): 24 (2012)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/inca/620166
Index futures; Causality; Conditional correlation; DCC-TGARCH-M; CCF test;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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- Antonakakis, Nikolaos & Kizys, Renatas & Floros, Christos, 2014. "Dynamic Spillover Effects in Futures Markets," MPRA Paper 53876, University Library of Munich, Germany.
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