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The dynamics in the spot, futures, and call options with basis asymmetries: an intraday analysis in a generalized multivariate GARCH-M MSKST framework

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Abstract

The main purpose of the study is to explore the dynamic relationship among the TAIEX spot, futures, and options markets by proposing an innovative multivariable GARCH-M MSKST (Multivariate Skewed-Student distribution) model. In addition to the considerable feedback effects of these three markets in terms of return transmissions, a significant bidirectional relationship is also found in volatility transmissions between futures and spot markets, and unidirectional spillover occurs from futures to options markets. Specifically, futures are found to exert the most influence on spot and options, and play an important role in disclosing information and pricing discovery to the other two markets. Comparing the magnitude of the effect the positive and negative basis has on spot prices, it is evident that positive basis has a greater impact on the spot market than negative basis does. Of interest, our study shows that positive basis has even more effect than negative basis does on the conditional variance of return on spot and futures.

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Notes

  1. The underlying asset is the Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX).

  2. In each interval, the last transaction price is identified.

  3. The sequence derived from the overnight return tends to induce a severe heterscedasticity problem. The deletion of overnight returns ensures synchronous prices and reduce the effects of stale prices in the index. It also removes any adjustment when switching to the next contract occurs at the expiry date.

  4. The constant conditional correlation assumption simplifies computation and inference. Moreover, it has been proven reasonable in many previous applications (Baillie and Bollerslev 1990; Kanas 1998; Lien and Tse 1998, 2000; Park and Switzer 1995; Theodossiou and Lee 1993; Tse 2000).

  5. We use the tri-variate GARACH model for our research, thus the setting k = 3.

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Authors and Affiliations

  1. Department of Finance, Tunghai University, Taichung, 407, Taiwan

    Kai-Li Wang

  2. Department of International Business Management, Da-Yeh University, Dacun, Changhua, Taiwan

    Mei-Ling Chen

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  1. Kai-Li Wang
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  2. Mei-Ling Chen
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Correspondence to Kai-Li Wang.

Appendix

Appendix

Table 11 The estimated parameters of the MGARCH-M MSKST model
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Wang, KL., Chen, ML. The dynamics in the spot, futures, and call options with basis asymmetries: an intraday analysis in a generalized multivariate GARCH-M MSKST framework. Rev Quant Finan Acc 29, 371–394 (2007). https://doi.org/10.1007/s11156-007-0050-y

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