Evaluating Volatility Spillover and Decay in Spot and Futures Markets: A Cross-Country Analysis

Abstract

Investment selection is critical for Investor Decision Making criteria, especially in volatile markets. The study aims to assess whether an investor should invest in the spot or futures markets amid volatility in these markets. The existing literature has extensively explored, volatility spillover amongst the spot and futures indices but the use of decay in volatility is very limited. This study exclusively focuses on the decay in volatility of, the spot and futures markets across 5 major economies of the world USA, China, Germany, India, and Japan; being the top 5 economies in the world.

By analyzing daily closing prices of the spot and futures indices of the economies from April 1, 2011, to September 30, 2024, this study employs the GARCH(1,1) Model to measure the degree of volatility spillover. The findings reveal that there is no significant difference in the decay in volatility amongst the spot and futures stock index prices of the 5 countries. This implies that in terms of volatility decay, investors face similar risk profiles whether they invest in spot or futures markets. The paper brings out a novel criterion of decision-making that is seldom used in research i.e. decay in volatility. The findings help investors and portfolio managers in strategizing whether to invest in the spot or futures markets through its assessment of Decay in Volatility and Volatility Persistence.