Threshold non-linear dynamics between Hang Seng stock index and futures returns

Hon-Lun Chung, Wai-Sum Chan and Jonathan Batten

The European Journal of Finance, 2011, vol. 17, issue 7, 471-486

Abstract: We test the joint dynamics between the Hong Kong Hang Seng Index futures and the underlying cash index using a Bivariate Threshold AutoRegressive model, which is better able to capture the complex return dynamics evident in financial time series. The results are consistent with a three-regime version of the model, where the lead-lag relation between the index and futures returns is a non-linear threshold-type and the regime switching process depends on the state of the threshold variable. This interaction is symmetric rather than unidirectional, with the strength of the interaction dependent on the regime. These three regimes are also characterised by significant variation in volume, which is consistent with liquidity-induced arbitrage trading.

Keywords: lead-lag relationship; threshold autoregression; non-linearity test; futures markets; Hang Seng index (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1080/1351847X.2010.481469

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