Intraday return and volatility relationships between the Ibex 35 spot and futures markets

This paper analyses the intraday lead-lag relationships between returns and volatilities in the Ibex 35 spot and futures markets. Using hourly data, we jointly analyze the interactions between markets, estimating a bivariate error correction model with GARCH perturbations which captures stochastical...

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Bibliographic Details
Published in:Spanish economic review 2002-09, Vol.4 (3), p.201-220
Main Author: Lafuente, Juan A
Format: Article
Language:English
Subjects:
Datasets
Economics
Empirical research
Error correction & detection
Futures
Futures market
Futures trading
Stochastic processes
Stock exchange
Stock exchanges
Volatility
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Summary:This paper analyses the intraday lead-lag relationships between returns and volatilities in the Ibex 35 spot and futures markets. Using hourly data, we jointly analyze the interactions between markets, estimating a bivariate error correction model with GARCH perturbations which captures stochastically the presence of an intraday U-shaped curve for both spot and futures market volatility. Our findings show a bidirectional causal relationship between market volatilities, with a positive feedback. This two-way transmission of volatility is consistent with market prices evolving according to a long-run equilibrium relationship, and shocks affecting both markets in the same direction. Our empirical results also support a unidirectional cross interaction from futures to spot market returns. This pattern suggests that the futures market leads the spot market in order to incorporate the arrival of new information.
ISSN:1435-5469
1435-5477
DOI:10.1007/s101080200044