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An Econometric Analysis of ETF and ETF Futures in Financial and Energy Markets Using Generated Regressors

Author

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  • Chia-Lin Chang

    (Department of Applied Economics, Department of Finance, National Chung Hsing University, Taichung 40224, Taiwan)

  • Michael McAleer

    (Department of Quantitative Finance, National Tsing Hua University, Hsinchu 30013, Taiwan
    Discipline of Business Analytics, University of Sydney Business School, NSW 2006, Australia
    Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam 3000, The Netherlands
    Department of Quantitative Economics, Complutense University of Madrid, 28223 Madrid, Spain)

  • Chien-Hsun Wang

    (Institute of Statistics, National Tsing Hua University, Hsinchu 30013, Taiwan)

Abstract

It is well known that there is an intrinsic link between the financial and energy sectors, which can be analysed through their spillover effects, which are measures of how the shocks to returns in different assets affect each other’s subsequent volatility in both spot and futures markets. Financial derivatives, which are not only highly representative of the underlying indices, but can also be traded on both the spot and futures markets, include Exchange Traded Funds (ETFs), a tradable spot index whose aim is to replicate the return of an underlying benchmark index. When ETF futures are not available to examine spillover effects, “generated regressors” are useful for constructing both financial ETF futures and energy ETF futures. The purpose of the paper is to investigate the co-volatility spillovers within and across the U.S. energy and financial sectors in both spot and futures markets, by using “generated regressors” and a multivariate conditional volatility model, namely diagonal BEKK. The daily data used are from 23 December 1998–22 April 2016. The dataset is analysed in its entirety and is also subdivided into three distinct subsets. The empirical results show there is a significant relationship between the financial ETF and energy ETF in the spot and futures markets. Therefore, financial and energy ETFs are suitable for constructing a financial portfolio from an optimal risk management perspective and also for dynamic hedging purposes.

Suggested Citation

  • Chia-Lin Chang & Michael McAleer & Chien-Hsun Wang, 2017. "An Econometric Analysis of ETF and ETF Futures in Financial and Energy Markets Using Generated Regressors," IJFS, MDPI, vol. 6(1), pages 1-24, December.
  • Handle: RePEc:gam:jijfss:v:6:y:2017:i:1:p:2-:d:124175
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    Cited by:

    1. Chang, Chia-Lin & McAleer, Michael & Wang, Yanghuiting, 2018. "Testing Co-Volatility spillovers for natural gas spot, futures and ETF spot using dynamic conditional covariances," Energy, Elsevier, vol. 151(C), pages 984-997.
    2. Alexopoulos, Thomas A., 2018. "To trust or not to trust? A comparative study of conventional and clean energy exchange-traded funds," Energy Economics, Elsevier, vol. 72(C), pages 97-107.

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    More about this item

    Keywords

    exchange traded funds; financial and energy sectors; co-volatility spillovers; spot and futures prices; generated regressors; diagonal BEKK;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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