Volatility Spillover Between the FTSE/JSE Top 40 Index and Index Futures: A Bekk-Garch and DCC-Garch Approach

Abstract

Understanding how information, and specifically volatility, flows between markets is of obvious interest to market participants. Given the importance of the FTSE/JSE Top 40 index as a barometer of the performance of the Johannesburg Stock Exchange (JSE) in South Africa, this paper investigates the volatility characteristics and volatility spillover effects between it and its corresponding futures contracts. A BEKK-GARCH approach is adopted to model volatility spillover effects, and the DCC-GARCH model applied as a confirmatory analysis of the BEKK-GARCH findings. Volatility spillover flows from the futures market to the index market, indicating that the FTSE/JSE Top 40 futures is the more informationally efficient market.

Acknowledgements

The financial assistance of the National Research Foundation is gratefully acknowledged, as are the helpful comments provided by the reviewers of this article.

Notes

2 The index and index futures markets have different opening (09:00 vs. 08:30) and closing times (17:00 vs. 17:30). Although a common trading interval may be preferred, intra-day data is simply not available over this length of time.

3 Complete unit root tests are available on request.

4 See Bollerslev, Chou and Kroner (1992) for a comprehensive review.

5 Complete correlograms (with AC, PAC and Q-Statistics with Probabilities) are available on request.