Testing intraday volatility spillovers in Turkish capital markets: evidence from ISE

Okur, Mustafa and Cevik, Emrah Ismail (2013): Testing intraday volatility spillovers in Turkish capital markets: evidence from ISE. Published in: Economic Research-Ekonomska Istraživanja , Vol. 26, No. 3 (2013): pp. 99-116.

Abstract

The aim of this article is to examine the presence of volatility transmission between futures index and underlying stock index by using intraday data in Turkey. We first examined the sudden changes in the variance of futures index return and the underlying spot index return. Then we employed the causality in the variance tests proposed by Hong (2001) and Hafner and Herwartz (2006). According to the empirical results, the spot market was found to be Granger cause of futures market and this result suggests that the spot market plays a more dominant role in the price discovery process in Turkey.

• Item Type: MPRA Paper
• Language: English
• Keywords: Spot and Futures Markets, Structural Breaks in Variance, Volatility Spillovers, Intraday Data, Causality in Variance.
• Subjects: G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Abhyankar, A. H. (1995). “Return and volatility dynamics in the FTSE 100 stock index and stock index futures markets”, The Journal of Futures Markets, 15: 457-458.

Aggarwal, R., Inclan, C., and Leal, R. (1999). “Volatility in emerging markets”, Journal of Financial and Quantitative Analysis, 34: 33-55.

Andreou, E., and Ghysels, E. (2002). “Detecting multiple breaks in financial market volatility dynamics”, Journal of Applied Econometrics, 17: 579-600.

Antoniou, A., Holmes, P., and Priestley, R. (1998). “The effects of stock index futures trading on stock index volatility: An analysis of the asymmetric response of volatility to news”, The Journal of Futures Markets, 18: 151-166.

Arago-Manzana, V., and Fernandez-Izquierdo, M. A. (2007). “Influence of structural changes in transmission of information between stock markets: a European empirical study”, Journal of Multinational Financial Management, 17: 112-124.

Arshanapalli, B., and Doukas, J. (1994). “Common volatility in S&P 500 index futures prices during October 1997”, The Journal of Futures Markets, 14: 915-925.

Avramov, D., Chordia, T., and Goyal, A. (2006). “The impact of trades on daily volatility”, Review of Financial Studies, 19: 1241-1277.

Baklaci, H., and Tutek, H. (2003). “The impact of the futures market on spot volatility: An analysis in Turkish derivatives markets”, Computational Finance and its Applications, 2: 237-246.

Bohl, M. T., Salm, C. A., and Wilfling, B. (2009). “Do individual index futures investors destabilize the underlying spot market?”, The Journal of Futures Markets, 31: 81-101.

Bollerslev, T. (1986). “Generalized autoregressive conditional heteroscedasticity,” Journal of Econometrics, 31: 307-327.

Bologna, P., and Cavallo, L. (2002). “Does the introduction of stock index futures effectively reduce stock market volatility? Is the ‘futures effect’ immediate? Evidence from the Italian stock exchange using GARCH”, Applied Financial Economics, 12,:183-192.

Booth, G. G., and So, R. W. (2003). “Intraday volatility spillovers in the German equity index derivatives markets”, Applied Financial Economics, 13: 487-494.

Caporale G. M., Pittis N, Spagnolo N. (2006). “Volatility transmission and financial crises”, Journal of Economics and Finance, 30:376–90.

Cevik, E. I., and Pekkaya, M. (2007). “Causality test in variance spot and future prices”, Dokuz Eylül Üniversitesi İİBF Dergisi, 22: 49-66.

Chan, K., and Chung, Y. P. (1995). “Vector autoregression or simultaneous equation model”, Journal of Banking and Finance, 19: 173-179.

Chan, K., Chan, K. C., and Karolyi, G. A. (1991). “Intraday volatility in the stock index and stock index futures markets”, Review of Financial Studies, 4: 657-684.

Cheung, Y. W., and Ng, L. K. (1996). “A causality-in-variance test and its application to financial market prices”, Journal of Econometrics, 72: 33-48.

Dickey, D. A., and W. A. Fuller. (1979). “Distribution of the estimators for autoregressive time series with a unit root”, Journal of the American Statistical Association, 74: 427-431.

Ewing, B. T., and Malik, F. (2010). “Estimating volatility persistence in oil prices under structural breaks”, The Financial Review, 45: 1011-1023.

Fernandez, V. (2006). “The impact of major global events on volatility shifts: Evidence from the Asian crisis and 9/11”, Economic Systems, 30: 79-97.

Grünbichler, A., Longstaff, F. A. and Schwatz, E. S. (1994). “Electronic screen trading and the transmission of information: An empirical examination”, Journal of Financial Intermediation, 3: 166-187.

Hafner, C. M., and Herwartz, H. (2006). “A Lagrange multiplier test for causality in variance”, Economics Letters, 93: 137-141.

Hillebrand, E. (2005). “Neglecting parameter changes in GARCH models”, Journal of Econometrics, 129: 121-138.

Holmes, P. (1996). “Spot price volatility, information and futures trading: Evidence from a thinly traded market”, Applied Economics Letters, 3: 63-66.

Hong, Y. (2001). “A test for volatility spillover with application to exchange rates”, Journal of Econometrics, 103: 183-224.

Iihara, Y., Kato, K. and Tokunaga, T. (1996). “Intraday return dynamics between the cash and futures markets in Japan”, The Journal of Futures Markets, 16: 147-162.

Inclan, C., and Tiao, G. C. (1994). “Use of cumulative sums of squares for retrospective detection of changes in variance”, Journal of the American Statistic Association, 89: 913-923.

Kasman, A., and Kasman, S. (2008). “The impact of futures trading on volatility of the underlying asset in the Turkish stock market”, Physica A: Statistical Mechanics and its Applications, 387: 2837-2845.

Kavussanos, M. G., Visvikis, I. D. and Alexakis, P. D. (2008). “The lead-lag relationship between cash and stock index futures in a new market”, European Financial Management, 14: 1007-1025.

Koutmos, G., and Tucker, M. (1996). “Temporal relationships and dynamic interactions between spot and futures stock markets”, The Journal of Futures Markets, 16: 55-69.

Kuo, W. H., Hsu, H., and Chiang, M. H. (20089. “Foreign investment, regulation, volatility spillovers between the futures and spot markets: Evidence from Taiwan”, Applied Financial Economics, 18: 421-430.

Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., and Shin, Y. (1992). “Testing the null hypothesis of stationarity against the alternative of a unit root”, Journal of Econometrics, 54: 159-178.

Lamoureux, C. G., and Lastrapes, W. D. (1990). “Persistence in variance, structural change and the GARCH model”, Journal of Business and Economic Statistics, 68: 225-234.

Li, G., Refalo, J. F., and Wu, L. (2008). “Causality in variance and causality in mean among European government bond markets”, Applied Financial Economics, 18: 1709-1720.

Liu, X., Cheng, S., Wang, S., Hong, Y., and Li, Y. (2008). “An empirical study on information spillover effects between the Chinese copper futures market and spot market”, Physica A: Statistical Mechanics and its Applications, 387: 899-914.

Mantalos, P., and Shukur, G. (2010). “The effect of spillover on the Granger causality test”, Journal of Applied Statistics, 37: 1473-1486.

Min, J. H., and Najand, M. (1999). “A further investigation of the lead-lag relationship between the spot market and stock index futures: early evidence from Korea”, The Journal of Futures Markets, 19: 217-232.

Pardo, A., and Torro, H. (2007). “Trading with asymmetric volatility spillovers”, Journal of Business Finance & Accounting, 34:1548–1568.

Phillips, P. C. B., and Perron, P. (1988). “Testing for a unit root in time series regression”, Biometrika, 75: 335-346.

Qadan, M., and Yagil, J. (2012). “Main or satellite? Testing causality-in-mean and variance for dually listed stocks”, International Journal of Finance and Economics, 17: 279–289.

Rapach, D. E., and Strauss, J. K. (2008). “Structural breaks and GARCH models of exchange rate volatility”, Journal of Applied Econometrics, 23: 65-90.

Rodrigues, P. M. M., and Rubia, A. (2007). “Testing for causality in variance under nonstationarity in variance”, Economics Letters, 97: 133-137.

Ryoo, H. J., and Smith, G. (2004). “The impact of stock index futures on the Korean stock market”, Applied Financial Economics, 14: 243-251.

Sanso, A., Arago, V., and Carrion, J. L. (2004). “Testing for change in the unconditional variance of financial time series”, Revista de Economia Financiera, 4: 32-53.

Shyy, G., Vijayraghavan, V., and Scott-Quinn, B. (1996). “A further investigation of the lead–lag relationship between the cash market and stock index futures market with the use of bid/ask quotes: the case of France”, Journal of Futures Markets, 16 (4): 405-420

Silvapulle, P., and Moosa, I. A. (1999). “The relationship between spot and futures prices: evidence from the crude oil market”, The Journal of Futures Markets, 19: 175-193.

So, R. W., and Tse, Y. (2004). “Price discovery in the Hang Seng index markets: Index, futures, and the tracker fund”, The Journal of Futures Markets, 24: 887-907.

Van Dijk, D., Osborn, D. R., and Sensier, M. (2005). “Testing for causality in variance in the presence of breaks”, Economics Letters, 89: 193-199.

Wang, K-M., and Thi, T-B. N. (2007). “Testing for contagion under asymmetric dynamics: Evidence from the stock markets between US and Taiwan”, Physica A, 376: 422-432.

Yang, J., Yang, Z. and Zhou, Y. (2011). “Intraday price discovery and volatility transmission in stock index and stock index futures markets: evidence from China”, The Journal of Futures Markets, (Article in press).

Zhong, M., Darrat, A. F. and Otero, R. (2004). “Price discovery and volatility spillovers in index futures markets: Some evidence from Mexico”, Journal of Banking and Finance, 28: 3037-3054.