The Effect of Market Quality on the Causality between Returns and Volatilities: Evidence from CSI 300 Index Futures

Abstract

This paper investigates the impact of market quality on volatility asymmetry of CSI 300 index futures by using short- and long-run causality measures proposed by Dufour et al. (2012). We use a high-frequency-based noise variance estimator as the comprehensive proxy for market quality and find that volatility asymmetry is closely related to market quality. Specifically, in the period of poor market quality, the volatility asymmetry will vanish or even be reversed, which is mainly due to the sharp decline of the leverage effects. Moreover, the volatility feedback effect will be enhanced while the leverage effect will be weakened if the noise variance is taken into consideration in the causal analysis. Finally, we use other market quality indices as auxiliary variables in the robustness analysis and get similar results. Keywords: Leverage effect, Volatility feedback effect, Volatility asymmetry, CSI 300 index futures, Market quality