Research On Price Discovery, Mispricing And Volatility For The CSI300Index Futures

The CSI300Index Futures Contracts was launched on April16,2010on the China Financial Futures Exchange, and gained a firm foothold successfully over the market expectation. As the first Exchange-traded standardized derivative in China, the CSI Index Futures achieved the requirements of "high standard and steady start". After two years development, the attendant number, contract position, average daily trading volume and other indicators increased steadily, and market scale was gradually expanding. From these dominant indicators, the CSI300Index Futures market has gained initial success, achieved the intended target. With the introduction of the related guidance documents for the broker, fund, QFII and trust accounts involved in the index futures market, institutional investors participating in futures trading has gradually accelerated.Theoretically, in a complete market, new information should be reflected in the futures and spot prices simultaneously, the transmission of information between two markets makes prices in a long-run equilibrium state. However, in reality, due to liquidity, transaction cost, investor structure, there is difference between the reaction of futures and spot prices. Prices will deviate from long-run equilibrium level, there exists arbitrage opportunities. Arbitrage trading further makes prices return to the equilibrium. The research for foreign mature markets shows that, because of the high leverage, low transaction cost and no short selling restriction, futures often reflect to information faster, which is more effective than the spot market.At the beginning three months, the CSI300index futures met with stock market crash, not only the expectation of futures leads Index not occur (Yang et al,2012), but also futures be questioned increasing the stock market volatility. Index price accelerated its rising from the end of September2010, futures also rose sharply, the rising speed even exceeded Index, volatility was also high, basis was high and continuous positive, arbitrage opportunity existed in the market. During the first half of2011, the market indicators finally improved, volatility tended to slow down with prices adjusting themselves near the equilibrium level. The change of institutional investor structure further provides conditions for futures market to function well.Although the CSI300index futures perform well since it has began trading, its development also goes through several different stages obviously. Whether its price discovery mechanism has been formed? Is the futures pricing reasonable? Is there volatility spillover from futures to spot market? Whether the index futures market stabilizes the spot market? Research on these issues is actually the investigation of futures market efficiency. As the index futures only be listed for a short time, a systematic, comprehensive and detailed research becomes necessary and urgently by using market real trading data.This thesis aims at study the new introduced CSI300index futures. Firstly, the forming process of futures price discovery mechanism is analyzed in depth. Then futures market mispricing, volatility spillover and stabilizing effect for cash market are discussed from these three different aspects. Finally, the characteristics of realized volatility for two markets are studied based on intraday high frequency data. The whole thesis is divided into eight part, the structural arrangement and main conclusion are as follows:Chapter One is introduction. It presents the background, significance, research methods and contents, the main conclusions, contributions, deficiency, and finally the research framework.Chapter Two is about theoretical foundation and literature review. It mainly contains the literature review for price discovery, mispricing, volatility spillover, influence to cash market volatility, volatility feature and modeling, and finally, a brief introduction for testing structural change.Chapter Three is the core of the whole thesis. It mainly studies the evolution of price discovery for the CSI300Index futures. First it calculates the real-time index price by the component stocks, analyzes the running situation and structural changes feature, and finally estimates the VECM and TVECM models. This chapter finds the formulation choroid of price discovery for the futures. Initially, futures price tends to follow the Index, from the end of September2010, neither the Index nor the futures appear to be leading strongly. Finally in the first half of 2011, the futures establish themselves in price discovery, and lead the price change of the Index. The price discovery has asymmetric property, whether it can be effectively functioned depends on the investor structure, the futures volume, open interest, index trend, as well as the size and direction of basis. Deducing of the main investor type is also a distinctive perspective.Chapter Four analyzes the pricing of index futures, including the influence factors and the nonlinear dynamic behavior. Result finds that transaction costs, index volatility, stock market trend, and futures contract maturity all influence futures prices. The adjusting process for mispricing exhibits nonlinear characteristics, during the year2010, negative mispricing has low proportion, but with quicker adjusting speed, and in the first half of2011, there is mainly positive mispricing, its adjusting speed accelerates significantly.Chapter Five examines volatility spillovers effects between the Index and futures market. By adding ECM to the GARCH-BEKK model, result shows that there exists bidirectional volatility spillovers effects; short volatility spillovers appears predominantly in the Index market; persistent volatility spillovers perform differently, initially futures market is stronger, then the Index market, in2011, futures market strengthens the persistent spillovers effects. ECM has significant influence to market volatility and behaves differently for the three sub-periods.Chapter Six investigates index volatility and jump features using SVCJ model before and after futures listed. The two years data demonstrates that index futures have the stabilizing effect for the cash market, but it mainly happened in the continuous part of index volatility, the jump features do not have significant improvement. For details, after the futures begin trading, continuous part speeds up the mean reversion speed, continuous volatility tends to decrease. There is no leverage effect at the beginning, but with time increasing, it begins to appear. The proportion for jump volatility is high, but the jump size and jump proportion appears decreasing. Futures volatility and average jump size are higher than Index,Chapter Seven studies the long memory feature and influence of return and volume on realized volatility. Realized volatility is divided into continuous and jump components, dynamics models are established separately by extending the HAR model. The results show that continuous volatility is the main component of the realized volatility, with high persistence, but jump part has little forecast ability. Return and volume have significant influence on continuous volatility. For details, futures return has weak asymmetric effect, index return has significant asymmetric effect to continuous part, with short traders have stronger influence in the down market, and medium-long traders have stronger influence in the up market. The current volume increases volatility and lagged volume reduces volatility significantly. There is no relation with market trend for futures volume, while index volume behaves slightly asymmetrically.Chapter Eight is the summary.In conclusion, after experiencing twisty development, the CSI300Index futures price discovery mechanism has finally formed. Mispricing comes back to the rational adjusting path, futures strength its volatility spillover effects to cash market. More importantly, as the cash market stabilizer, the futures have the stabilizing effect for the cash market. With institutional investors accelerated their participating in futures trading, the information efficiency has gradually improving for futures market, and market efficiency appears strengthening, move on to rationality and mature.The possible innovations include:(1) I find the evolution of price discovery mechanism for the CSI300Index futures, and present a possible explanation using behavioral finance theory, the analysis is more comprehensive and in-depth;(2) For the studies of pricing efficiency, information efficiency and stabilization cash market reflect the research depth, the adjusting process for mispricing, evolution for volatility spillover keep consistency to price discovery process, and then concludes to the market becoming mature and efficiency;(3) Unlike the previous study only concerned with volatility, this thesis discusses volatility from both continuous and jump volatility. The conclusion is that the stabilizing effect of index futures mainly happened in the continuous part. The realized volatility has long-run memory feature, and returns and volume have significant influence to the continuous part, the jump part has little forecasting ability.Possible deficiencies:(1) In dealing with data, the first sample period for chapter three to five exists structural break, which may lead the result unstable, but I do not study the subdivide sample; When studying stabilizing effect of futures, the selected sample is only about two years, which is slightly shorter; Due to data restrictions, I do not study the optimal sampling frequency when studying the realized volatility;(2) The whole research process follows closely to only two markets, not considers the marcro-economic factors fully. It does not study the change of volatility for the non-underlying index;(3) For research methods, the whole thesis mainly does empirical study, and innovations also be reflected in the empirical results, the theoretical innovation is still not enough.