Bidirectional Volatility Spillovers between Spot and Futures Markets: A Comparative Analysis of CSI 300 and CSI 500 Indexes

Aims: This paper investigates the volatility spillover effect from spot to futures (or futures to spot) and examines the differences between the CSI 300 and CSI 500 indexes.

Study Design: Empirical analysis using Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model.

Place and Duration of Study: The daily closing prices of CSI 300 index, CSI 500 index, CSI 300 index futures, and CSI 500 index futures from April 16, 2015, to April 16, 2024, are selected for the empirical study.

Methodology: The GARCH model is employed due to its effectiveness in capturing time-varying volatility and analyzing the volatility spillover effect from spot to futures (or futures to spot), as well as to examine the holiday effect and Tuesday effect in volatility of daily returns of CSI 300 index, CSI 500 index, CSI 300 index futures, and CSI 500 index futures.

Results: A significant bidirectional spillover effect between futures and spots exists in the CSI 300 and CSI 500 indexes. In addition, the holiday effect and the Tuesday effect are detected in the volatility of daily returns of the CSI 300 index, CSI 500 index, CSI 300 index futures, and CSI 500 index futures.

Conclusion: The CSI 500 index has a larger volatility spillover effect than the CSI 300 index, implying that small and mid-cap companies are more susceptible to market fluctuations than large-cap companies. These findings have important implications for investors and policymakers, particularly regarding risk management.