Volatility Spillover and Risk Transmission between Spot and Futures Markets in India across Multiple Asset Classes Using Dynamic Connectedness and DCC-GARCH Models
K S Gagan Deep
Affiliation:
¹CMS Business School, JAIN (Deemed-to-be University), Bangalore, India
Email:
Gagandeep.fin@gmail.com
ABSTRACT
This study examines the presence of volatility spillovers and risk transmission between the NIFTY 50 spot market, NIFTY 50 futures, Gold futures, and USD/INR currency futures in India. The main objective is to understand whether uncertainty in one financial market affects the volatility of another and to identify the dominant market influencing risk transmission. The study uses daily data from January 2021 to December 2025, consisting of 1012 observations. Log returns were calculated and analysed using econometric models such as ARCH, GARCH (1,1), VAR, Granger causality, variance decomposition and DCC-GARCH models.
The results show strong volatility persistence across all markets, with significant ARCH and GARCH effects confirming volatility clustering. Correlation results indicate a very strong relationship between NIFTY spot and NIFTY futures (0.9839), while gold and currency markets show weaker relationships, suggesting diversification opportunities. The VAR model confirms limited but existing interdependence between the markets. Granger causality results reveal bidirectional relationships between gold and equity markets, indicating information flow between these segments. Variance decomposition results show that most markets are driven mainly by their own shocks, with NIFTY spot explaining about 95.97% of the variation in NIFTY futures. The DCC-GARCH model confirms the presence of dynamic conditional correlations, showing that market relationships change over time.
Overall, the findings confirm that Indian financial markets are interconnected, with the equity market acting as a major transmitter of volatility, while gold and currency markets act as partial receivers. The study contributes to understanding market integration and provides useful insights for investors, portfolio managers, and risk managers for better diversification and risk management decisions.
Keywords: Volatility Spillover, GARCH Model, DCC-GARCH, Financial Market Integration, Risk Transmission
