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Volatility transmission across stock index futures when there are structural changes in return variance

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  • Po-Kai Huang

Abstract

This article investigates volatility transmission process between the US, the UK and Japanese stock index futures markets. Most importantly, we examine that whether structural changes have effect on volatility transmission process. We use Iterated Cumulative Sums of Squares (ICSS) algorithm proposed by Inclan and Tiao (1994) to identify time points of structural changes exiting in the financial time series. Our results show that there is no common structural change in variances for three futures returns. This implies that diversification across stock index futures markets is possible. We find that volatility in three stock index futures markets are directly affected by its own lagged volatility. There are asymmetric volatility transmission effects between Japan and the UK and Japan and the US. In addition, there are bidirectional cross market volatility transmission between the UK and the US. However, this relation does not hold after controlling for structural changes in the bivariate Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model. We find that the measure of volatility transmission differs in intensity from that otherwise estimated. These findings support that structural changes in variance and GARCH model misspecification influence information flow and hence the scheme of transmission.

Suggested Citation

  • Po-Kai Huang, 2012. "Volatility transmission across stock index futures when there are structural changes in return variance," Applied Financial Economics, Taylor & Francis Journals, vol. 22(19), pages 1603-1613, October.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:19:p:1603-1613
    DOI: 10.1080/09603107.2012.669459
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    Cited by:

    1. Jung, R.C. & Maderitsch, R., 2014. "Structural breaks in volatility spillovers between international financial markets: Contagion or mere interdependence?," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 331-342.
    2. Dejan ŽIVKOV & Jovan NJEGIĆ & Ivan MILENKOVIĆ, 2018. "Interrelationship between DAX Index and Four Largest Eastern European Stock Markets," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 88-103, September.
    3. Farooq Malik, 2022. "Volatility spillover among sector equity returns under structural breaks," Review of Quantitative Finance and Accounting, Springer, vol. 58(3), pages 1063-1080, April.
    4. Caporin, Massimiliano & Malik, Farooq, 2020. "Do structural breaks in volatility cause spurious volatility transmission?," Journal of Empirical Finance, Elsevier, vol. 55(C), pages 60-82.
    5. Claudiu Tiberiu Albulescu & Daniel Goyeau & Aviral Kumar Tiwari, 2017. "Co-movements and contagion between international stock index futures markets," Empirical Economics, Springer, vol. 52(4), pages 1529-1568, June.
    6. Dimitrios Kartsonakis-Mademlis & Nikolaos Dritsakis, 2022. "Asymmetric volatility transmission in Japanese stock market in the presence of structural breaks," The Japanese Economic Review, Springer, vol. 73(4), pages 647-677, October.
    7. Yarovaya, Larisa & Brzeszczyński, Janusz & Lau, Chi Keung Marco, 2016. "Intra- and inter-regional return and volatility spillovers across emerging and developed markets: Evidence from stock indices and stock index futures," International Review of Financial Analysis, Elsevier, vol. 43(C), pages 96-114.
    8. Wang, Xunxiao & Wang, Yudong, 2019. "Volatility spillovers between crude oil and Chinese sectoral equity markets: Evidence from a frequency dynamics perspective," Energy Economics, Elsevier, vol. 80(C), pages 995-1009.
    9. Jovan Njegić & Dejan Živkov & Irena Janković, 2018. "Interrelationship and Spillover Effect between Stock and Exchange Rate Markets in the Major Emerging Economies," Prague Economic Papers, Prague University of Economics and Business, vol. 2018(3), pages 270-292.
    10. Dimitrios Kartsonakis‐Mademlis & Nikolaos Dritsakis, 2021. "Asymmetric volatility spillovers between world oil prices and stock markets of the G7 countries in the presence of structural breaks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3930-3944, July.
    11. Malinda & Maya & Jo-Hui & Chen, 2022. "Testing for the Long Memory and Multiple Structural Breaks in Consumer ETFs," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 12(6), pages 1-6.

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