Volatility Spillover between the KOSPI 200 Spot and Futures Markets Using the VECM-DCC-GARCH Model

2011 ◽  
Vol 19 (3) ◽  
pp. 233-249
Author(s):  
Sang Hoon Kang ◽  
Seong-Min Yoon
Keyword(s):  
Information Flow ◽  
Futures Markets ◽  
Price Discovery ◽  
Spillover Effects ◽  
Spot Market ◽  
Futures Market ◽  
Market Volatility ◽  
Futures Contracts ◽  
Volatility Spillover ◽  
Asymmetric Volatility

This paper investigates the price discovery, volatility spillover, and asymmetric volatility spillover effects between the KOSPI 200 market and its futures contracts market. The investigation was performed using the VECM-DCC-GARCH approach. In the case of returns, we found a significant unidirectional information flow from the futures market to the spot market; this implies that the KOSPI 200 futures market plays an important role on the price discovery in the spot market. In addition, we found a strong bi-directional casualty involving the volatility interaction between the spot and futures markets; this implies that market volatility originating in the spot market will influence the volatility of the futures market and vice versa. We also found strong asymmetric volatility spillover effects between the two markets.

Price Discovery Process and Volatility Spillover in Spot and Futures Markets: Evidences of Individual Stocks

2010 ◽  
Vol 35 (2) ◽  
pp. 49-62 ◽  
Author(s):  
T Mallikarjunappa ◽  
E M Afsal
Keyword(s):  
Futures Markets ◽  
Price Discovery ◽  
Spillover Effect ◽  
Spot Market ◽  
Futures Market ◽  
Discovery Process ◽  
Short Term ◽  
Asymmetric Volatility ◽  
Spot Volatility ◽  
Price Discovery Process

This paper analyses information-based superiority of markets mainly with an objective of exploring arbitrage opportunities. It attempts to determine the lead-lag relationship between spot and futures markets in the Indian context by using high frequency price data of twelve individual stocks, observed at one-minute interval. The study applies the concept of co-integration and establishes the spot-futures relationship using Vector Error Correction Mechanism (VECM) represented by EGARCH framework. To study the price discovery process in the two markets, five lags each of one-minute resolution for nine individual stocks and four lags for the remaining three stocks are chosen. The key results of the study are given below: There is a contemporaneous and bi-directional lead-lag relationship between the spot and futures markets. A feedback mechanism of short life is functional between the two markets. Price discovery occurs in both the markets simultaneously. There exists short-term disequilibrium that could be corrected in the next period. Volatility spillover from spot market to futures market is present in such a way that a decrease in spot volatility leads to a decrease in futures volatility. Volatility shocks are asymmetric and persistent in both the markets. Spillover from futures market to spot market is not significant. Neither spot nor futures assume a considerable leading role and neither of the markets is supreme in price discovery. In the case of 33.33 per cent of spot values and 33.33 per cent of futures values, there exists short-term disequilibrium that could be corrected in the next period by decreasing the prices. Spot market volatility spills over to futures market in most of the cases (66.66 %) and a decrease in spot volatility brings about a decrease in futures volatility in 50 per cent of the cases. Spillover effect from futures to spot market is present and significant in 91.66 per cent of stocks and is more than the spillover effect from spot to futures (50% valid cases). The markets are highly integrated. Asymmetric behaviour of volatility shocks is mixed in both the markets. Asymmetric volatility is detected in 50 per cent of the cases of spot market and 58.33 per cent cases of futures market. Stocks exhibiting asymmetric volatility show more sensitivity to negative shocks. There are no cases of market becoming more volatile in response to good news.

Price discovery and volatility spillover: an empirical evidence from spot and futures agricultural commodity markets in India

2020 ◽  
Vol 10 (4) ◽  
pp. 447-473 ◽  
Author(s):  
Manogna R L ◽  
Aswini Kumar Mishra
Keyword(s):  
Granger Causality ◽  
Futures Markets ◽  
Price Discovery ◽  
Spillover Effects ◽  
Futures Market ◽  
Commodity Markets ◽  
Volatility Spillover ◽  
Agricultural Commodity ◽  
Content Type ◽  
Spot Prices

PurposePrice discovery and spillover effect are prominent indicators in the commodity futures market to protect the interest of consumers, farmers and to hedge sharp price fluctuations. The purpose of this paper is to investigate empirically the price discovery and volatility spillover in Indian agriculture spot and futures commodity markets.Design/methodology/approachThis study uses Granger causality, vector error correction model (VECM) and exponential generalized autoregressive conditional heteroskedasticity (EGARCH) to examines the price discovery and spillover effects for nine most liquid agricultural commodities in spot and futures markets traded on National Commodity and Derivatives Exchange (NCDEX).FindingsThe VECM results show that price discovery exists in all the nine commodities with futures market leading the spot in case of six commodities, namely soybean seed, coriander, turmeric, castor seed, guar seed and chana. Whereas in case of three commodities (cotton seed, rape mustard seed and jeera), price discovery takes place in the spot market. The Granger causality tests indicate that futures markets have stronger ability to predict spot prices. Supporting these, the results from EGARCH volatility test reveal that there exist mutual spillover effects on futures and spot markets. Thus, it could be inferred that futures market is more efficient in price discovery of agricultural commodities in India.Research limitations/implicationsThese results can help the market participants to benefit by hedging out the uncertainty and the policymakers to design futures contracts to improve the efficiency of the agricultural commodity derivatives market.Practical implicationsThe findings provide fresh view on lead–lag relationship between future and spot prices using the latest data confirming that futures market indeed is dominant in price discovery.Originality/valueThere are very few studies that have explored the efficiency of the agricultural commodity spot and futures markets in India using both price discovery and volatility spillover in a detailed manner, especially at the individual agriculture commodity level.

Does Commodity Derivatives Function Effectively? A lengthy Discussion

2021 ◽  
pp. 227797522098574
Author(s):  
Bhabani Sankar Rout ◽  
Nupur Moni Das ◽  
K. Chandrasekhara Rao
Keyword(s):  
Price Discovery ◽  
Spot Market ◽  
Futures Market ◽  
The Other ◽  
Volatility Spillover ◽  
Agricultural Commodities ◽  
Commodity Derivatives ◽  
Derivative Market ◽  
Negative Shock ◽  
Lengthy Discussion

The present work has been designed to intensely investigate the capability of the commodity futures market in achieving the aim of price discovery. Further, the downside of the cash and futures market and transfer of the risk to other markets has also been studied using VaR, and Bivariate EGARCH. The findings of the work point that the metal commodity derivative market helps in the efficient discovery of price in the spot market except for nickel. But, in the case of the agricultural commodities, the spot is found to be leading and thus there is no price discovery except turmeric. On the other hand, the volatility spillover is bidirectional for both agri and metal commodities except copper, where volatility spills only from futures to spot. Further, the effect of negative shock informational bias differs from commodity to commodity, irrespective of metal or agriculture.

scholarly journals Has COVID-19 Changed the Hedge Effectiveness of Bitcoin?

2021 ◽  
Vol 9 ◽  
Author(s):  
Yinpeng Zhang ◽  
Panpan Zhu ◽  
Yingying Xu
Keyword(s):  
Futures Markets ◽  
Vector Autoregression ◽  
Spot Market ◽  
Futures Market ◽  
Conditional Heteroskedasticity ◽  
Volatility Spillover ◽  
Empirical Results ◽  
Dynamic Correlation ◽  
Autoregressive Conditional Heteroskedasticity ◽  
Gold Futures

The Bitcoin market has become a research hotspot after the outbreak of Covid-19. In this paper, we focus on the relationships between the Bitcoin spot and futures. Specifically, we adopt the vector autoregression-dynamic correlation coefficient-generalized autoregressive conditional heteroskedasticity (VAR-DCC-GARCH) model and vector autoregression-Baba, Engle, Kraft, and Kroner-generalized autoregressive conditional heteroskedasticity (VAR-BEKK-GARCH) models and calculate the hedging effectiveness (HE) value to investigate the dynamic correlation and volatility spillover and assess the risk reduction of the Bitcoin futures to spot. The empirical results show that the Bitcoin spot and futures markets are highly connected; second, there exists a bi-directional volatility spillover between the spot and futures market; third, the HE value is equal to 0.6446, which indicates that Bitcoin futures can indeed hedge the risks in the Bitcoin spot market. Furthermore, we update the data to the post-Covid-19 period to do the robustness checks. The results do not change our conclusion that Bitcoin futures can hedge the risks in the Bitcoin spot market, and besides, the post-Covid-19 results indicate that the hedging ability of Bitcoin futures increased. Finally, we test whether the gold futures can be used as a Bitcoin spot market hedge, and we further control other cryptocurrencies to illustrate the hedging ability of the Bitcoin futures to the Bitcoin spot. Overall, the empirical results in this paper will surely benefit the related investors in the Bitcoin market.

A Study on the Price Discovery and Asymmetric Volatility Spillovers between Single-Stock Futures and Spot Markets: Focused on Korea‘s 4 Financial Holding Companies

2011 ◽  
Vol 19 (3) ◽  
pp. 281-308
Author(s):  
Hong Chung-Hyo
Keyword(s):  
Price Discovery ◽  
Spillover Effects ◽  
Spot Markets ◽  
Volatility Spillover ◽  
Holding Companies ◽  
Asymmetric Volatility ◽  
Empirical Results ◽  
Financial Holding ◽  
Financial Holding Companies ◽  
Single Stock Futures

This paper investigated the price discovery and asymmetric volatility spillover effects between single stock futures and spot markets. For this purpose we employ 4 largest Korean financial holding companies's daily data covering the period from May 7, 2008 to the end of December, 2010. We introduce the Nelson (1991)'s Exponential GARCH models and the major empirical results are as follows; First, according to Johansen co-integration test, there is a long run relationship between the level variables of 4 financial holding companies' futures and cash markets. Second, based on Granger causality test, 3 financial holding companies's futures contracts among 4 have an impact on the spot returns at a significant level. Third, financial holding companies' futures and spot markets are influenced at 10% to 27% by previous price changes of each market. Fourth, there is a asymmetric volatility spillover effects in 4 financial holding companies futures markets. From this result we infer that individual futures and spot markets in banking area are more sensitive to bad news than good news. These empirical results are consistent with the those of Sakthivel and Kamaiah (2010), Chan et al.(1991), Lien and Tse (2000), Yang et al.(2001) and from these results we infer that 4 single stock futures market are more efficient than those of there spot markets.

Crude Oil Volatility Transmission Across Food Commodity Markets: A Multivariate BEKK-GARCH Approach

2020 ◽  
pp. 097265272092762
Author(s):  
M. Thenmozhi ◽  
Shipra Maurya
Keyword(s):  
Crude Oil ◽  
Futures Markets ◽  
Spot Market ◽  
Futures Market ◽  
Spot Price ◽  
Volatility Spillover ◽  
Oil Futures ◽  
Long Run ◽  
Short Run ◽  
Crude Oil Futures

This study examines the time-varying price risk transmission in the nexus between crude oil and agricultural commodity prices in the context of non-grain-based biofuel producing country. Analysis of the short- and long-run dynamics of volatility in both spot and futures markets of maize, soybean and wheat and crude oil prices using the multivariate BEKK-GARCH model, indicate volatility spillover from wheat futures to crude oil futures in the short run and from crude oil futures to futures markets of maize, soybean and wheat in the long run. The spot market linkage of selected commodities is weaker compared to futures market, wherein maize spot volatility transmits to crude oil spot market in the longer period and no spillover between crude oil-food spot market is observed in the short run. The hedge ratios indicate that a dynamic hedging strategy is crucial for efficient risk management and the portfolio weights in futures market are more than the spot market. The results reveal that cross-market volatility spillover is more evident in the futures market, while own past conditional volatility is more significant in spot price discovery and risk transmission is evident among food commodities futures markets. JEL Codes: G13, G14, Q11, Q18, Q02

VOLATILITY SPILLOVER BETWEEN SPOT AND FUTURES MARKET OF HIGHLY TRADED COMMODITIES IN INDIA: The DCC-GARCH Approach

2018 ◽  
Vol 05 (09) ◽  
pp. 34-49
Author(s):  
Ruchika Kaura ◽  
Nawal Kishor ◽  
Namita Rajput
Keyword(s):  
Spillover Effect ◽  
Spillover Effects ◽  
Futures Market ◽  
Market Volatility ◽  
Multivariate Garch ◽  
Management Policy ◽  
Commodity Market ◽  
Time Varying ◽  
Volatility Spillover ◽  
Conditional Correlation

This study intends to examine the volatility spillover effects and measure the time-varying correlations between futures and spot prices of thirteen highly traded commodities traded on Multi Commodity Exchange (MCX) of India. The research uses Exponential GARCH proposed by Nelson (1991) to explore the direction and magnitude of spillover effects between futures and spot commodity market and employs Dynamic Conditional Correlation (DCC) GARCH proposed by Engle (2002) to demonstrate the time varying conditional correlation between heteroscedastic coefficients of the futures and spot markets. Empirical results show that significant and asymmetric bi-directional volatility spillover effects exist in case of most of the selected commodities, even though, the magnitude of volatility spillover is found larger in the direction from futures market to spot market. The dynamic correlation between the conditional variance of the spot and future markets is found to be significant in case of all the commodities except Silver and Copper. It proves that significant volatility spillover effect is present between spot and futures markets of selected commodities. Understanding of volatility transmission and interrelationship between spot and futures commodity market will help investors make right investment decisions, portfolio optimization and financial risk management. Policy makers and regulators can use this knowledge in planning and implementing appropriate regulatory framework. Much of the earlier research focuses on inter market volatility spillover taking into consideration two or more different financial markets. This study focuses on intra market volatility spillover by studying the interactions of spot-futures prices of commodities. Also, considering the time-varying nature of conditional correlations, this study employs EGARCH and multivariate GARCH (DCC) to capture the volatility spillover effects instead of univariate GARCH or standard linear VAR models.

scholarly journals Volatility Dynamics in Oil and Oilseeds Spot and Futures Market in India

2016 ◽  
Vol 41 (2) ◽  
pp. 132-148 ◽  
Author(s):  
Meenakshi Malhotra ◽  
Dinesh Kumar Sharma
Keyword(s):  
Futures Markets ◽  
Garch Model ◽  
Price Volatility ◽  
Spot Market ◽  
Futures Market ◽  
Spot Price ◽  
Volatility Spillover ◽  
Trading Activity ◽  
Futures Trading ◽  
The Impact

Executive Summary India occupies the fifth position in the vegetable oil economy of the world. The demand for oilseeds and vegetable oil has far exceeded the domestic output necessitating huge imports. Futures market helps to bring price stability for the development of the underlying physical market. The present study investigates the volatility dynamics in spot and futures markets of select oil and oilseeds commodities. The objectives of this article are to study (a) the information transmission process between spot and futures markets, also called volatility spillover and (b) the impact of futures trading activity on the volatility of physical market prices. The commodities selected from oil and oilseeds segment are refined soya oil, mustard seed, crude palm oil, and mentha oil. The study uses basic Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model to capture volatility in prices of the selected commodities. Bivariate GARCH model makes use of information in the history of two different markets for testing volatility spillover between two markets of the same underlying commodity. The relationship between futures trading activity and spot price volatility is investigated for examining the impact of futures trading activity on the volatility of underlying spot market. Two variables, viz., futures trading volume and open interest are decomposed into expected and unexpected components and are taken as a proxy for the level of trading activity. The contemporaneous and dynamic relationships are studied with the help of augmented GARCH model and Granger causality, respectively. It is observed that there is an efficient transmission of information between spot and futures markets but it is the spot market which leads to the flow of information to futures and hence causes greater spillover of volatility. The spot market has a greater impact on the volatility of futures market, indicating that informational efficiency of oilseeds spot market is stronger than that of the futures market. The contemporaneous and dynamic relationship between spot price volatility and futures trading activity tested with econometric models provide evidence of the destabilizing impact of an unexpected increase in futures trading activity (volume or open interest) on the spot price volatility in three out of four commodities studied. This indicates that badly informed traders present in futures market are destabilizing the underlying spot market by inducing noise and lowering the information content of prices.

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