Asymmetric covariance in spot‐futures markets

Abstract

This article studies how the spot-futures conditional covariance matrix responds to positive and negative innovations. The main results of the article are achieved by obtaining the Volatility Impulse Response Function (VIRF) for asymmetric multivariate GARCH structures, extending Lin (1997) findings for symmetric GARCH models. This theoretical result is general and can be applied to analyze covariance dynamics in any financial system. After testing how multivariate GARCH models clean up volatility asymmetries, the Asymmetric VIRF is computed for the Spanish stock index IBEX-35 and its futures contract. The empirical results indicate that the spot-futures variance system is more sensitive to negative than positive shocks, and that spot volatility shocks have much more impact on futures volatility than vice versa. Additionally, evidence is obtained showing that optimal hedge ratios are insensitive to the well-known asymmetric volatility behavior in stock markets.

Asymmetric variance and spillover effects

“…Our study improve the previous evidence related to the Spanish stock market (e.g., Pardo and Torró, 2003;Meneu and Torró, 2003;Fernández and Aragó, 2003;Cuñado et al, 2004) using new methodologies and providing new evidence.…”

“…Pardo and Torró (2003) studied volatility spillovers between large and small firms by analyzing the impulseresponse function for conditional volatility computed following the Lin (1997) and Meneu and Torró (2003) procedure. They show that volatility spillovers exist in both senses between sized portfolios after bad pieces of news.…”

Hedging Performance and Stock Market Liquidity: Evidence from the Taiwan Futures Market

“…Brooks et al, 2002;Meneu & Torro, 2003). The rationale behind the use of GARCH models lies in the fact that these models readjust the hedging position as new information becomes available.…”

Volatility transmission patterns and terrorist attacks

“…The asymmetric VIRF (AVIRF) for the asymmetric BEKK model is introduced in Meneu and Torró (2003). Similarly, it would be interesting to distinguish between periods of relative stability and periods of financial distress.…”