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A study on volatility and return spillover of exchange-traded funds and their benchmark indices in India

Buvanesh Chandrasekaran and Rajesh H. Acharya

Managerial Finance, 2019, vol. 46, issue 1, 19-39

Abstract: Purpose - The purpose of this paper is to empirically examine the volatility and return spillover between exchange-traded funds (ETFs) and their respective benchmark indices in India. The paper uses time series data which consist of equity ETF and respective index returns. Design/methodology/approach - The study uses autoregressive moving average–generalized autoregressive conditional heteroscedasticity and autoregressive moving average–exponential generalized autoregressive conditional heteroscedasticity models. The study uses data from the inception date of each ETF to December 2016. Findings - The findings of the paper confirm that there is unidirectional return spillover from the benchmark index to ETF returns in most of the ETFs. Furthermore, ETF and benchmark index return have volatility persistence and show the presence of asymmetric volatility wherein a negative news has more influence on volatility compared to a positive news. Finally, unlike unidirectional return spillover, there is a bidirectional volatility spillover between ETF and benchmark index return. Practical implications - The study has several practical implications for investors and regulators. A positive daily mean return over a fairly long period of time indicates that the passive equity ETFs can be a viable long-term investment option for ordinary investors. A bidirectional volatility spillover between the ETFs and benchmark index returns calls for the attention of the market regulators to examine the reasons for the same. Originality/value - ETFs have seen fast growth in the Indian market in recent years. The present study considers the longest period data possible.

Keywords: Volatility spillover; GARCH; EGARCH; ETF; Asymmetric volatility (search for similar items in EconPapers)
Date: 2019
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