Volatility behavior, information efficiency and risk in the S&P 500 index markets

Shu Mei Chiang*, Hui-Min Chung, Chien Ming Huang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

We propose an ARJI-Trend model-a combination of the ARJI and component models-to capture the distinguishing features of US index returns, with the results indicating that our model has a good fit for the volatility dynamics of spot, floor- traded and E-mini index futures in US markets. Although certain analogous characteristics are discernible amongst the three indices (such as the responses by the transitory components to innovations, the high persistence in the trends, and the relative importance of jump variance), the reaction to news is found to be heterogeneous amongst the S&P 500 indices. Furthermore, the out-of-sample forecasting performances of both the ARJI-Trend model and the GARCH model are found to have general equivalence for the S&P 500 indices. Our analyses further show that the mini-sized index market is the most efficient with regard to the transmission of information in both the short and long run. This suggests that, following the introduction of E-mini futures, these instruments have come to play a dominant role in price discovery. Overall, our empirical results are very encouraging, insofar as the proposed ARJI-Trend model is found to be a useful tool for helping practitioners to gain a better understanding of the differential attributes between spot, general and mini-sized products in US stock markets.

Original languageEnglish
Pages (from-to)1421-1437
Number of pages17
JournalQuantitative Finance
Volume12
Issue number9
DOIs
StatePublished - 1 Sep 2012

Keywords

  • ARJI-Trend model
  • Components
  • Jumps
  • S&P 500 index

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