A Study Of Volatility Spillover Between Index Structured Fund And Underlying Stock Index

Since the structured fund with different income layers was been introduced into domestic market in 2007, it has experienced nearly 10 years of gradual improvement in the terms of product design and operation. Because structured fund can meet different risk and return preferences of different investors and owns an actively secondary market and the flexible and convenient exit mechanism, it has maintained a steady pace of development. And the bull market in 2015 greatly promoted the explosive growth of structured fund.Index structured fund makes the main component of the domestic structured fund market. The soaring number and size of index structured fund is largely due to its B shares whose leverage magnify the underlying index returns under the bull market when investors are pursuing leveraged products. But when the stock market is faced with the impact of bad news, the price volatility of index structured fund is more intense than underlying stock index. Meanwhile, the frequently down share conversion of grade B cause investors’sentiment panic, triggering strong concern of the entire financial market.Although the fluctuations in the value of index structured fund depends on its underlying stock index level, sub shares of index structured fund have an actively secondary market independent of the underlying stock index price, attributed to the embedded option value. Therefore, there is a close relationship in price volatility between index structured fund and the underlying stock index. This paper aims to study volatility spillover between index structured fund market and underlying stock index market, in order to enrich the relevant empirical studies, clarify the direction of information flow between the two markets, and provide references for stabilization of financial market.Based on univariate GARCH model, cross-correlation function (CCF) statistics of standard residuals squared is established to test the volatility spillover effects. The empirical results of cross correlations show that to a certain extent there is a relationship in price volatility between index structured fund and the underlying stock index, but this correlation disperses among numerous lags. The empirical results of CCF statistics show that there is no significant relationship in volatility spillover between A share and the underlying stock index due to its inherent nature of bonds, and there is significant unilateral relationship in volatility spillover between B share and the underlying stock index in some industries, although the direction of the overflow is not the same, indicating that the leverage nature of B share enhances sensitivity of prices and speed of inter-market information flow rate.