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Asymmetric covariance in spot‐futures markets
Author(s) -
Meneu Vicente,
Torró Hipòlit
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10099
Subject(s) - futures contract , autoregressive conditional heteroskedasticity , volatility (finance) , economics , econometrics , conditional variance , financial economics , forward volatility , spot contract , covariance , stock (firearms) , implied volatility , mathematics , statistics , mechanical engineering , engineering
This article studies how the spot‐futures conditional covariance matrix responds to positive and negative innovations. The main results ofthe article are achieved by obtaining the Volatility Impulse Response Function (VIRF) for asymmetric multivariate GARCH structures, extendingLin (1997) findings for symmetric GARCH models. This theoretical result is general and can be applied to analyze covariance dynamics in anyfinancial system. After testing how multivariate GARCH models clean up volatility asymmetries, the Asymmetric VIRF is computed for the Spanish stockindex IBEX‐35 and its futures contract. The empirical results indicate that the spot‐futures variance system is more sensitive tonegative than positive shocks, and that spot volatility shocks have much more impact on futures volatility than vice versa. Additionally, evidence isobtained showing that optimal hedge ratios are insensitive to the well‐known asymmetric volatility behavior in stock markets. © 2003 WileyPeriodicals, Inc. Jrl Fut Mark 23:1019–1046, 2003