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An Econometric Analysis of ETF and ETF Futures in Financial and Energy Markets Using Generated Regressors

1
Department of Applied Economics, Department of Finance, National Chung Hsing University, Taichung 40224, Taiwan
2
Department of Quantitative Finance, National Tsing Hua University, Hsinchu 30013, Taiwan
3
Discipline of Business Analytics, University of Sydney Business School, NSW 2006, Australia
4
Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam 3000, The Netherlands
5
Department of Quantitative Economics, Complutense University of Madrid, 28223 Madrid, Spain
6
Institute of Advanced Sciences, Yokohama National University, Yokohama 240-8501, Japan
7
Institute of Statistics, National Tsing Hua University, Hsinchu 30013, Taiwan
*
Author to whom correspondence should be addressed.
The authors are grateful to Wen-Ping Hsieh, Leh-Chyan So and five reviewers for very helpful comments and suggestions. For financial support, the first author wishes to thank the National Science Council, Ministry of Science and Technology (MOST), Taiwan, and the third author acknowledges the Australian Research Council and the National Science Council, Ministry of Science and Technology (MOST), Taiwan.
Int. J. Financial Stud. 2018, 6(1), 2; https://doi.org/10.3390/ijfs6010002
Received: 9 September 2017 / Revised: 1 December 2017 / Accepted: 5 December 2017 / Published: 23 December 2017
It is well known that there is an intrinsic link between the financial and energy sectors, which can be analysed through their spillover effects, which are measures of how the shocks to returns in different assets affect each other’s subsequent volatility in both spot and futures markets. Financial derivatives, which are not only highly representative of the underlying indices, but can also be traded on both the spot and futures markets, include Exchange Traded Funds (ETFs), a tradable spot index whose aim is to replicate the return of an underlying benchmark index. When ETF futures are not available to examine spillover effects, “generated regressors” are useful for constructing both financial ETF futures and energy ETF futures. The purpose of the paper is to investigate the co-volatility spillovers within and across the U.S. energy and financial sectors in both spot and futures markets, by using “generated regressors” and a multivariate conditional volatility model, namely diagonal BEKK. The daily data used are from 23 December 1998–22 April 2016. The dataset is analysed in its entirety and is also subdivided into three distinct subsets. The empirical results show there is a significant relationship between the financial ETF and energy ETF in the spot and futures markets. Therefore, financial and energy ETFs are suitable for constructing a financial portfolio from an optimal risk management perspective and also for dynamic hedging purposes. View Full-Text
Keywords: exchange traded funds; financial and energy sectors; co-volatility spillovers; spot and futures prices; generated regressors; diagonal BEKK exchange traded funds; financial and energy sectors; co-volatility spillovers; spot and futures prices; generated regressors; diagonal BEKK
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MDPI and ACS Style

Chang, C.-L.; McAleer, M.; Wang, C.-H. An Econometric Analysis of ETF and ETF Futures in Financial and Energy Markets Using Generated Regressors. Int. J. Financial Stud. 2018, 6, 2. https://doi.org/10.3390/ijfs6010002

AMA Style

Chang C-L, McAleer M, Wang C-H. An Econometric Analysis of ETF and ETF Futures in Financial and Energy Markets Using Generated Regressors. International Journal of Financial Studies. 2018; 6(1):2. https://doi.org/10.3390/ijfs6010002

Chicago/Turabian Style

Chang, Chia-Lin; McAleer, Michael; Wang, Chien-Hsun. 2018. "An Econometric Analysis of ETF and ETF Futures in Financial and Energy Markets Using Generated Regressors" Int. J. Financial Stud. 6, no. 1: 2. https://doi.org/10.3390/ijfs6010002

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