Return and Volatility Dynamics in the Spot and Futures Markets in Australia: An Intervention Analysis in a Bivariate EGARCH‐X Framework

Abstract

Abstract This article provides evidence of linkages between the equity market and the index futures market in Australia, where the futures market has experienced a major structural event due to the futures contract respecification. A bivariate Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model is developed that includes a cointegrating residual as an explanatory variable for both the conditional mean and the conditional variance. The conditional mean returns from both markets are influenced by the long‐run equilibrium relationship, and these markets are informationally linked through the second moments. The crossmarket spillovers exhibit asymmetric behavior in that the volatility responses to past standardized innovations are different for market advances and market retreats. An intervention analysis shows that some of the parameters describing the return‐generating process have shifted after the contract respecification by the futures exchange. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:833–850, 2001