The Dow Jones Industrial Average (DJIA) is the most widely quoted stock index worldwide. This article examines the price discovery process, volatility spillover and asymmetric volatility spillover effects between the DJIA index and the index futures. The Johansen (1988) cointegrating model suggests that most of the price discovery takes place at the futures market. By examining the volatility spillover from the futures market to spot market based on dynamic correlation coefficient model of Engle (2002), a significant unidirectional information flow is found. That is, innovations in futures market can predict the future volatility in spot market. There is also asymmetric volatility spillover effects from the futures market to spot market. However, contracting the existing empirical results, bad news in the futures market do not have a greater impact on volatility in the spot market than good news.
Keywords: dynamic correlation coefficient model,
volatility spillovers, asymmetric volatility spillover
