An Empirical Research On Chinese Stock Index Futures Market Functions

Since the1980s, the first stock index futures contracts was born in the USA, as a kind of financial derivative, stock index futures has been got a rapid development in the world, which now is a kind of futures with largest trading scale in the world. April16,2010, Chinese mainland formally introduced the CSI300stock index futures. The introduction of stock, index futures not only provide a new hedging tool for investors, improve the use efficiency of funds, but also improve the capital market structure of Chinese mainland, enrich financial derivative product categories, which has an important meaning to the development of Chinese mainland.However, as a financial derivatives market, CSI300stock index futures market is still in its infancy, will experience a long-term process to develop, improve and gradually mature. In this process, it is particularly necessary to strengthen the follow-up analysis of CSI300stock index futures market, discover the existence of problems in the operation of the market and constantly modify and improve the relevant systems.In this context, this paper will take empirical researches on price discovery function, stabilizing market function and hedging function as the main line, to in-depth study the operation status of CSI300stock index futures market. According to the issues reflected by the empirical research conclusions, this paper will put forward relevant suggestions to improve our stock index futures market.There are seven chapters in this paper. Chapter one is the introduction, which contains the background and significance of the research, the review of relative literature, the main research contents and methods, the structural arrangement of the paper, as well as possible innovations. Chapter two is an overview of stock index futures, which contains the relative concepts, the principles and methods of preparation of the CSI300Index, the contents and characteristics of the CSI300 index futures contracts. Chapter three is the empirical research on price discovery function of CSI300stock index futures, including the static and dynamic performance of price discovery function. Chapter four studies the impact of stock index futures on volatility of spot market, including the long-term impact of introducing stock index on volatility of spot market and short-term impact of expiration day effects. Chapter five is a research on hedging strategies of stock index futures, which contains the introduction of different kinds of hedging theory and hedging models and the comparison of hedging effectiveness of different kinds of hedging models. Chapter six is a study on hedging effectiveness of CSI300index futures. Chapter seven is the summary, recommendations and outlook of the study, which summarizes the main conclusions, puts forward relevant suggestions, and outlooks the further study.The main research results are summarized as follows:1. Examining the static and dynamic performance of price discovery function of CSI300stock index futures.First, using co-integration test, Granger causality test, VEC model, impulse response function analysis, variance decomposition and multiple regression models to examine the static performance of price discovery function of CSI300stock index futures, the results consistently indicated that the prices of stock index futures and spot market lead to each other, the futures prices lead spot prices for5minutes, and the spot prices lead futures prices for5minutes too.Second, using high-frequency CSI300stock index and main stock index futures contact date, and recursive co-integration tests and the common factor model, to do a thorough research on time-varying price discovery function performance of CSI300stock index futures. The results indicated that there was no stable co-integration between futures and spot markets at its infancy stage, stock index futures did not have price discovery function. As the improvement of futures market, about from3rd June 2010, there began to have a stable co-integration relationship between futures and spot markets. The futures market began to have price discovery function, but from high-frequency data up to September17,2012, it did not function well in price discovery performance, we found that the spot market rather futures market played a more dominant role in the price discovery process.The last, this paper carries on explanation from such aspects:high barriers to entry, unreasonable structure of investors and imperfect spot market trading system etc.2. Examining the impact of stock index futures on volatility of spot market, including the long-term impact of introducing stock index on volatility of spot market and short-term impact of expiration day effects.First, using GARCH model with dummy variable and Markov-switching-GARCH model to examine the impact of the introducing CSI300index futures trading on the volatility of underlying spot market. Since Markov-switching-GARCH model can endogenously identify distinct volatility and capture a gradual change of volatility, overcome economic shortcomings of the existing GARCH model with dummy variable. The results consistently indicated that the introducing of futures trading reduces the volatility of underlying spot market. The Stabilizing function of CSI300index futures plays well.Second, carrying on explanation form the aspect of market information transmission efficiency, the study found that after the introduction of stock index futures, spot market information transmission efficiency is not improved, but slightly decreased, which may be related to unsatisfactory performance of price discovery function of stock index futures.The last, using one minute high frequency date and autoregressive model with dummy variables to investigate whether the CSI300index futures have expiration day effects. The main conclusions of the research:Firstly, on expiration days of the CSI300index futures, the spot market is not associated with abnormal large volume; Secondly, on expiration days of the CSI300index futures, the spot market is not associated with abnormal change index volatility. From the two conclusions, no expiration day effects are found in the CSI300index futures of China. This paper argues that it is due to the reasonable mechanism of settlement price determination, the small size of the futures market and special structure of futures markets investors.3. Examining the evolution of hedging theories and hedging models, and evaluating hedging effectiveness of different kinds of hedging models.In accordance with the evolution of hedging model, this paper investigates the optimal hedge ratios and hedging effectiveness of CSI300stock index futures, and compare the hedging effectiveness of the different hedging model based on "minimum variance "principle and "optimum utility" principle. The empirical results indicate that Based on the "minimum variance "principle, Diagonal ECM-BGARCH(1,1) model is the best model to evaluate the optimal hedge ratio for both in-sample dates and out-sample dates; Based on the "optimum utility" principle, regardless of the size of risk aversion parameter, DCC-GARCH is the best hedging model for in-sample dates and Scalar ECM-BGARCH (1,1) is the best hedging model for out-sample dates. The results shown that hedging effectiveness of dynamic hedging models is generally better than the static hedging models, but with higher operating costs. Therefore, in actual hedging model selection, need a comprehensive evaluation of performance and cost of hedging models.4. Examining the hedging effectiveness of CSI300stock index futures.Using EGARCH model, this paper first investigates the hedging effectiveness of CSI300index futures contract on10heaviest warehouse stocks of the fund, and then investigates the hedging effectiveness of CSI300index futures contract on10stocks that are randomly selected from SME board of Sheng Zheng stock exchange. It is found that the former hedging effectiveness is not very good, the latter effectiveness is even worse. In order to offer more practical hedging tools, China should learn the experiences of overseas markets, and launch index futures on stocks of SME board and stocks of other industries. In the end, this paper has a simulative empirical test on the hedging performance of policy idea’s SME index futures, which prove that the policy idea is worth into practice.5. Putting forward relevant suggestions to improve the futures market.According to issues reflected by above conclusions, this paper puts forward relevant suggestions from these aspects:the transaction threshold, the structure of investors, stock market trading rules and the varieties of stock index futures.