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Article
Publication date: 8 November 2011

Bakri Abdul Karim, Mohamad Jais and Samsul Ariffin Abdul Karim

The purpose of this paper is to examine the effects of the current global crisis on the integration and co‐movements of selected stock index futures markets.

1861

Abstract

Purpose

The purpose of this paper is to examine the effects of the current global crisis on the integration and co‐movements of selected stock index futures markets.

Design/methodology/approach

Time series techniques of cointegration and weekly data covering the period from January 2001 to December 2009 were used in this study. The period of analysis was divided into two periods, namely the pre‐crisis period (January 2001‐July 2007) and during crisis period (August 2007‐December 2009).

Findings

No evidence was found of cointegration among the stock index futures markets in both periods. Accordingly, the 2007 subprime crisis does not seem to affect the long‐run co‐movements among the stock index futures markets.

Practical implications

The stock index futures markets provide opportunity for the potential benefits from international portfolio diversification and hedging strategies even after the subprime crisis. The stock index futures significantly extended the variety of investment and risk management strategies available to investors.

Originality/value

Examining the effects of the US subprime crisis on the stock index futures markets integration, to the best of the authors' knowledge, goes clearly beyond the existing literature on the subject matter.

Article
Publication date: 4 January 2022

Song Cao, Ziran Li, Kees G. Koedijk and Xiang Gao

While the classic futures pricing tool works well for capital markets that are less affected by sentiment, it needs further modification in China's case as retail…

Abstract

Purpose

While the classic futures pricing tool works well for capital markets that are less affected by sentiment, it needs further modification in China's case as retail investors constitute a large portion of the Chinese stock market participants. Their expectations of the rate of return are prone to emotional swings. This paper, therefore, explores the role of investor sentiment in explaining futures basis changes via the channel of implied discount rates.

Design/methodology/approach

Using Chinese equity market data from 2010 to 2019, the authors augment the cost-of-carry model for pricing stock index futures by incorporating the investor sentiment factor. This design allows us to estimate the basis in a better way that reflects the relationship between the underlying index price and its futures price.

Findings

The authors find strong evidence that the measure of Chinese investor sentiment drives the abnormal fluctuations in the basis of China's stock index futures. Moreover, this driving force turns out to be much less prominent for large-cap stocks, liquid contracting frequencies, regulatory loosening periods and mature markets, further verifying the sentiment argument for basis mispricing.

Originality/value

This study contributes to the literature by relying on investor sentiment measures to explain the persistent discount anomaly of index futures basis in China. This finding is of great importance for Chinese investors with the intention to implement arbitrage, hedging and speculation strategies.

Details

China Finance Review International, vol. 12 no. 3
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 14 March 2019

Xuebiao Wang, Xi Wang, Bo Li and Zhiqi Bai

The purpose of this paper is to consider that the model of volatility characteristics is more reasonable and the description of volatility is more explanatory.

Abstract

Purpose

The purpose of this paper is to consider that the model of volatility characteristics is more reasonable and the description of volatility is more explanatory.

Design/methodology/approach

This paper analyzes the basic characteristics of market yield volatility based on the five-minute trading data of the Chinese CSI300 stock index futures from 2012 to 2017 by Hurst index and GPH test, A-J and J-O Jumping test and Realized-EGARCH model, respectively. The results show that the yield fluctuation rate of CSI300 stock index futures market has obvious non-linear characteristics including long memory, jumpy and asymmetry.

Findings

This paper finds that the LHAR-RV-CJ model has a better prediction effect on the volatility of CSI300 stock index futures. The research shows that CSI300 stock index futures market is heterogeneous, means that long-term investors are focused on long-term market fluctuations rather than short-term fluctuations; the influence of the short-term jumping component on the market volatility is limited, and the long jump has a greater negative influence on market fluctuation; the negative impact of long-period yield is limited to short-term market fluctuation, while, with the period extending, the negative influence of long-period impact is gradually increased.

Research limitations/implications

This paper has research limitations in variable measurement and data selection.

Practical implications

This study is based on the high-frequency data or the application number of financial modeling analysis, especially in the study of asset price volatility. It makes full use of all kinds of information contained in high-frequency data, compared to low-frequency data such as day, weekly or monthly data. High-frequency data can be more accurate, better guide financial asset pricing and risk management, and result in effective configuration.

Originality/value

The existing research on the futures market volatility of high frequency data, mainly focus on single feature analysis, and the comprehensive comparative analysis on the volatility characteristics of study is less, at the same time in setting up the model for the forecast of volatility, based on the model research on the basic characteristics is less, so the construction of a model is relatively subjective, in this paper, considering the fluctuation characteristics of the model is more reasonable, characterization of volatility will also be more explanatory power. The difference between this paper and the existing literature lies in that this paper establishes a prediction model based on the basic characteristics of market return volatility, and conducts a description and prediction study on volatility.

Details

China Finance Review International, vol. 10 no. 2
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 31 January 2011

Chih‐Hsiang Chang, Hsin‐I Cheng, I‐Hsiang Huang and Hsu‐Huei Huang

The purpose of the paper is to investigate the price interrelationship between the Taiwanese and US financial markets.

1272

Abstract

Purpose

The purpose of the paper is to investigate the price interrelationship between the Taiwanese and US financial markets.

Design/methodology/approach

The trivariate GJR‐GARCH (1,1) model and event study were employed to investigate volatility asymmetry and overreaction phenomenon, respectively.

Findings

The empirical results show that return volatility reveals the asymmetric phenomenon, and the holding period returns on US index futures from the opening of the US index futures electronic trading to the opening of the Taiwanese stock market are an important reference for investors in the Taiwanese stock market. Additionally, the paper presents an overreaction of the Taiwan Stock Exchange Capitalization Weighted Stock Index to a drastic price rise of E‐min NASDAQ 100 Index futures at the opening of the Taiwanese stock market.

Research limitations/implications

This paper deletes the observations arising from the different national holidays of the USA and Taiwan, to have the same number of observations in both markets, which might contaminate the empirical results.

Practical implications

Investors in the Taiwanese stock market tend to pay more attention to the fluctuations in the share prices of high‐technological companies in the USA.

Originality/value

Most of the previous studies regarding price transmission between the Taiwanese and US stock markets focused mainly on the Taiwanese market reactions to the overnight returns of the US market. This paper enlarges the current field by examining the lead‐lag relationship, the volatility asymmetry, and the overreaction phenomenon between the Taiwanese and US financial markets according to the most updated US stock index information.

Details

Managerial Finance, vol. 37 no. 1
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 15 May 2017

Xuejun Fan and De Du

Focusing on the spillover effects between the CSI 500 stock index futures market and its underlying spot market during April to September 2015, the purpose of this paper…

Abstract

Purpose

Focusing on the spillover effects between the CSI 500 stock index futures market and its underlying spot market during April to September 2015, the purpose of this paper is to explore whether Chinese stock index futures should be responsible for the 2015 stock market crash.

Design/methodology/approach

Using both linear and non-linear econometric models, this paper empirically examines the mean spillover and the volatility spillover between the CSI 500 stock index futures market and the underlying spot market.

Findings

The results showed the following: the CSI 500 stock index futures market has significant one-way mean spillover effect on its spot market. The volatility in CSI 500 stock index futures market also has a significant positive spillover effect on its spot stock market, and the mean value of dynamic correlation coefficient between the two market volatility is 0.4848. The spillover effect of the CSI 500 stock index futures market on the underlying spot market is significantly asymmetric, characterized by relatively moderate and slow during the period of the markets rising, yet violent and rapid during the period of the markets falling. The findings suggest that although the stock index futures itself was not the “culprit” of Chinese stock market crash in 2015, its existence indeed accelerated and exacerbated the stock market’s decline under the imperfect trading system.

Originality/value

Different from the existing literature mainly focusing on CSI 300 stock index futures, this paper empirically examines the impact of the introduction of CSI 500 stock index futures on 2015 Chinese stock market crash for the first time.

Details

China Finance Review International, vol. 7 no. 2
Type: Research Article
ISSN: 2044-1398

Keywords

Book part
Publication date: 2 December 2003

Y.Peter Chung, Jun-Koo Kang and S.Ghon Rhee

We examine the impact of the unique Japanese stock market microstructure on the pricing of stock index futures contracts. We use intraday transactions data for the Nikkei…

Abstract

We examine the impact of the unique Japanese stock market microstructure on the pricing of stock index futures contracts. We use intraday transactions data for the Nikkei 225 Futures contracts in Osaka and the corresponding Nikkei 225 Index in Tokyo. Incorporating more realistic transaction-cost estimates and various institutional impediments in Japan, we find that the time-varying liquidity of some component shares of the index in Tokyo represents the most critical impediment to intraday arbitrage and often causes futures prices in Osaka to deviate significantly and persistently from their no-arbitrage boundary, especially for longer-lived contracts.

Details

The Japanese Finance: Corporate Finance and Capital Markets in ...
Type: Book
ISBN: 978-1-84950-246-7

Article
Publication date: 4 October 2022

Sivakumar Sundararajan and Senthil Arasu Balasubramanian

This study examines the dynamic linkages between the Indian Nifty index futures traded on the offshore Singapore Exchange (SGX) and US stock indices (DJIA, NASDAQ and S&P…

Abstract

Purpose

This study examines the dynamic linkages between the Indian Nifty index futures traded on the offshore Singapore Exchange (SGX) and US stock indices (DJIA, NASDAQ and S&P 500) under the closure of the spot market for Nifty futures.

Design/methodology/approach

With high-frequency 5-min overlapping price data, the authors employ the Johansen cointegration test to investigate long-run relationships, the Granger causality test to assess short-run dynamics and the BEKK-GARCH model for volatility spillover investigation.

Findings

The empirical findings reveal that the SGX Nifty futures market is cointegrated with the US DJIA market. The US DJIA stock index strongly influences the price discovery of SGX Nifty futures and past innovations in the US markets strongly impact the current volatility of SGX Nifty futures.

Practical implications

Findings from this study have significant implications for market participants, particularly foreign investors and portfolio managers. These findings might be helpful for market participants to improve the prediction power of expected SGX Nifty futures price and volatility, especially under the closure of the spot market. Also, SGX market participants can take the significant role of the US market into account when formulating hedging and trading strategies with Indian Nifty futures. Besides, our findings have significant implications for policymakers in evaluating market stability.

Originality/value

This article adds to the very limited research on offshore or international stock index futures; it is the first study that empirically examines the international linkages of offshore SGX Nifty futures under the closure of its underlying spot market and also the driving force behind the linkages.

Details

Managerial Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 14 August 2009

Sathya Swaroop Debasish

The purpose of this paper is to examine the lead‐lag relationships between the National Stock Exchange (NSE) Nifty stock market index (in India) and its related futures

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Abstract

Purpose

The purpose of this paper is to examine the lead‐lag relationships between the National Stock Exchange (NSE) Nifty stock market index (in India) and its related futures and options contracts, and also the interrelation between the derivatives markets.

Design/methodology/approach

The paper uses serial correlation of return series and autoregressive moving average (ARMA) model for studying the lead‐lag relationship between hourly returns on the NSE Nifty index and its derivatives contracts like futures, call and put options. Further, the lead‐lag relation between hourly returns of the derivatives contracts among themselves is also studied using ARMA models.

Findings

The ARMA analysis shows that the NSE Nifty derivatives markets tend to lead the underlying stock index. The futures market clearly leads the cash market although this lead appears to be eroding slightly over time. Although the options market leads the cash overall, there is some feedback between the two with the underlying index leading at times. Further, it is found that the index call options lead the index futures more strongly than futures lead calls, while the futures lead puts more strongly than the reverse.

Practical implications

The results imply that the derivative contracts on NSE Nifty lead the underlying cash market. Thus, the derivative markets are indicative of futures price movements and this will certainly be helpful to potential investors to design their risk‐return portfolio while investing in stocks and derivatives contracts.

Originality/value

This paper is an original piece of work towards exploring the lead‐lag relation between NSE Nifty and the derivative contracts. The issue of price discovery on futures and spot markets and the lead‐lag relationship are topics of interest to traders, financial economists, and analysts.

Details

The Journal of Risk Finance, vol. 10 no. 4
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 2 March 2015

Yang Hou and Steven Li

– This paper aims to investigate the volatility transmission and dynamics in China Securities Index (CSI) 300 index futures market.

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Abstract

Purpose

This paper aims to investigate the volatility transmission and dynamics in China Securities Index (CSI) 300 index futures market.

Design/methodology/approach

This paper applies the bivariate Constant Conditional Correlation (CCC) and Dynamic Conditional Correlation (DCC) Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models using high frequency data. Estimates for the bivariate GARCH models are obtained by maximising the log-likelihood of the probability density function of a conditional Student’s t distribution.

Findings

This empirical analysis yields a few interesting results: there is a one-way feedback of volatility transmission from the CSI 300 index futures to spot returns, suggesting index futures market leads the spot market; volatility response to past bad news is asymmetric for both markets; volatility can be intensified by the disequilibrium between spot and futures prices; and trading volume has significant impact on volatility for both markets. These results reveal new evidence on the informational efficiency of the CSI 300 index futures market compared to earlier studies.

Originality/value

This paper shows that the CSI 300 index futures market has improved in terms of price discovery one year after its existence compared to its early days. This is an important finding for market participants and regulators. Further, this study considers the volatility response to news, market disequilibrium and trading volume. The findings are thus useful for financial risk management.

Details

Studies in Economics and Finance, vol. 32 no. 1
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 1 October 1995

Francis E. Laatsch and Shane A. Johnson

We investigate the causal relationships between volatility implied in Major Market Index (MMI) options and its component stocks' options from January, 1987 to October…

Abstract

We investigate the causal relationships between volatility implied in Major Market Index (MMI) options and its component stocks' options from January, 1987 to October, 1989. We find that MMI implied volatility Granger causes component stock implied volatility for all twenty component stocks, which is consistent with the hypothesis that changes in volatility in index options markets leads volatility in underlying component (cash) markets. When we further analyze the sample by subperiod, we find that the causal relationships are insignificant in the period after the October 1987 crash, which is consistent with the hypothesis that exchange and regulatory actions taken after the crash weakened the influence of index options markets on cash markets. Trading strategies and programs involving stock index options and futures have been blamed for increasing volatility of the stock market. Indeed, trading in index futures and options markets has been blamed for much of the drop in stock prices in the crash of October 1987. After the crash, regulators took several actions to reduce the influence of futures and options market volatility on cash market volatility. If regulators' fears were legitimate and their efforts were successful, the volatility linkage between index options markets and their underlying cash markets should have been weakened. This paper provides two important contributions to our understanding of the volatility implications of index options markets. First, we examine the causality relationships between index and component stock implied volatility to assess whether or not changes in volatility in the index option market lead changes in volatility in the underlying component stock markets. Second, we test whether the causal relationships differ before and after the October 1987 crash to assess whether or not regulatory actions after the crash caused a change in these relationships. We measure volatility using implied standard deviations (ISDs) from options on the Major Market Index (MMI) and its component stocks. We form time series of ISDs for both the MMI and its component stocks, and then apply Granger causality tests to the series. For the full sample period of January 1987 to October 1989, we find that changes in index ISDs do Granger cause changes in component stock ISDs for all twenty component stocks, evidence consistent with the notion that volatility in index option market leads volatility in the component (cash) market. When we analyze the sample by subperiod, however, we find that the significant Granger causality holds only in the period before the October 1987 crash. Post‐crash subperiods show insignificant causality relationships, which suggests that efforts taken by exchange officials and regulators to reduce the influence of volatility in the index options and futures markets on cash market volatility were successful. The remainder of the paper is structured as follows. In Section I we discuss the potential for causal relationships between index option markets and their component markets and review related literature. Section II contains a discussion of our methodology and a description of our data. Section III contains a discussion of our results and Section IV concludes.

Details

Managerial Finance, vol. 21 no. 10
Type: Research Article
ISSN: 0307-4358

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