Threshold non-linear dynamics between Hang Seng stock index and futures returns
Abstract
We test the joint dynamics between the Hong Kong Hang Seng Index futures and the underlying cash index using a Bivariate Threshold AutoRegressive model, which is better able to capture the complex return dynamics evident in financial time series. The results are consistent with a three-regime version of the model, where the lead-lag relation between the index and futures returns is a non-linear threshold-type and the regime switching process depends on the state of the threshold variable. This interaction is symmetric rather than unidirectional, with the strength of the interaction dependent on the regime. These three regimes are also characterised by significant variation in volume, which is consistent with liquidity-induced arbitrage trading.Download Info
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Article provided by Taylor and Francis Journals in its journal The European Journal of Finance.
Volume (Year): 17 (2011)
Issue (Month): 7 ()
Pages: 471-486
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Handle: RePEc:taf:eurjfi:v:17:y:2011:i:7:p:471-486
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For corrections or technical questions regarding this item, or to correct its listing, contact: (Michael McNulty).
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Keywords: lead-lag relationship; threshold autoregression; non-linearity test; futures markets; Hang Seng index;References
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