Return and Volatility Dynamics in the Spot and Futures Markets in Australia: an Intervention Analysis in a Bivariate Egarch-x Framework

This paper 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. An extended bivariate EGARCH model is developed that includes 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 cross-market spillovers exhibit asymmetric behaviour in that the volatility responses to past standardised 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. I thank an anonymous referee and Robert I. Webb, the Editor for their helpful comments and suggestions. All errors and omissions are my sole responsibility.