TY - JOUR
T1 - Asymmetries, causality and correlation between FTSE100 spot and futures
T2 - A DCC-TGARCH-M analysis
AU - Tao, Juan
AU - Green, Christopher J.
N1 - Publisher Copyright:
© 2012 Elsevier Inc.
PY - 2012
Y1 - 2012
N2 - 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 premiumeffect in futures but amomentumeffect 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.
AB - 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 premiumeffect in futures but amomentumeffect 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.
KW - CCF test
KW - Causality
KW - Conditional correlation
KW - DCC-TGARCH-M
KW - Index futures
UR - http://www.scopus.com/inward/record.url?scp=84942552234&partnerID=8YFLogxK
U2 - 10.1016/j.irfa.2012.07.002
DO - 10.1016/j.irfa.2012.07.002
M3 - Article
AN - SCOPUS:84942552234
SN - 1057-5219
VL - 24
SP - 26
EP - 37
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
ER -