ISSN: 2056-3736 (Online Version) | 2056-3728 (Print Version)

Relationships among US S&P500 Stock Index, its Futures and NASDAQ Index Futures with Volatility Spillover and Jump Diffusion: Modeling and Hedging Performance

Hsiang-Hsi Liu and Yu-Cheng Lin

Correspondence: Hsiang-Hsi Liu, hsiang@mail.ntpu.edu.tw

National Taipei University, Taiwan

pdf (1948.07 Kb) | doi: https://doi.org/10.47260/bae/818

Abstract

This study takes the US S&P500 stock index cash, futures and NASDAQ stock index futures as the main research objects, and applies the ARJI (autoregressive jump intensity model) VEC GJR-GARCH model to examine the co-integration, volatility spillover, jump behavior and hedge performance of the three markets. With the rapid circulation of new information, the financial market will often fluctuate under the impact of new information. Investors will have different and timely responses to emergencies, and this event will have an impact on the stock market. When the event is unexpected or abnormal, the financial market will have huge fluctuations, and this kind of fluctuation is a jump. The empirical results found that the three markets have linkages and volatility spillover effects, and there are indeed discontinuous jumps. Two-way volatility spillovers between S&P500 index cash and futures, and only one-way volatility spillovers from S&P500 futures to the Nasdaq futures market. International investors need to consider information from their own-market volatility (risk) as well as information on volatility spillovers (risk) from other markets. The jump frequency is not a fixed constant, that is, the jump frequency (strength) generated by abnormal information changes over time. In addition, the results of this research also found that the ARJI VEC GJR-GARCH model can better capture the risk of fluctuations in price discontinuities after adding jump factors to the hedging performance estimated by the ARJI VEC GJR-GARCH model. The hedging performance can be more effective, which is conducive to investors' risk management decisions. Also, the performance of direct hedging that is better than the performance of cross hedging.

Keywords:

  Jump Intensity, Jump Size, Co-integration, ARJI, VEC GJR-GARCH, Hedging Ratio, Hedging Performance.


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