Research Of Price Discovery Function Between Stock Index Futures And Stock Index Markets

Stock index futures market is useful in risk management, and since the launch of it in the United States, it has goes through a rapid development. China has enjoyed economy boom and great prosperity over the last two decades, in order to improve its financial market and promote the efficiency of capital allocation, relevant departments has made great efforts to bring out it. April 16,2010 China CSI 300 index futures were officially listed and traded in the market. What will happen to the capital market of China has became the focus of research.Stock index futures can significantly affect the spot market in many aspects. This article focuses on the price discovery function between CSI 300 index futures market and its underlying stock market. Price discovery is a dynamic process to reach the market equilibrium price according to new information. Because futures market has a superior trade mechanism such as, lower trade cost and higher leverage. When investors receive new information they are able to react more quickly in futures market. This will result in a more efficient price discovery process. But it is not mean this function will always play a role in the spot market, exerting of this function is based on good market liquidity as well as large scale of market trading.After the introduce of trade mechanism in stock index futures market, this paper uses the closing price data of CSI 300 index futures to carry out empirical analysis, in order to find out the price discovery function between the price of spot and futures markets. First, Augmented Dickey-Fuller(ADF)model and Johansen co-integration test show that the two time series are unstable, but there exits a steady equilibrium relationship in the long run. Then by using Granger Causality test, we can see that there is a bi-directional relationship between the price of stock index and stock index futures market. And in order to figure out the short term adjustment process to the long run equilibrium,this article establishes vector error correction model(VECM) and finds that both of the CSI 300 index futures market and spot market have effect in price discovery function,and when there is a deviation between the two markets, it is futures market who makes adjustment to correct the deviation. It means the stock index market is in a dominant position and plays a major role in the price discovery process. In the further research, by using impulse response function, variance decomposition methods and information share model, this paper analyzes the results of one standard impulse to both markets showing that the price discovery function of futures market is restrained, stock index price plays a leading role in this function.In order to enhance the price discovery function of CSI 300 index futures, supervision departments should encourage institutional investors to participate in stock index futures market in order to promote the liquidity and scale of market. At the same time regulars should ruthlessly crack down on unfair related trading and speculative activities to protect the benefits of medium and small investors. Besides this, China Financial Future Exchange can optimize the trade mechanism of stock index futures by creating mini-index future. There is a high threshold in futures market, therefore the majority of medium and small investors are unable to enter future transactions, which limit the liquidity and efficiency of futures market, and set an obstruction in the price discovery function.Because CSI 300 index futures was listed and traded a short time ago, previous studies were based simulated trading and may cause the results to be inaccurate, this article uses the real trade data to establish empirical analysis, it can provide a more precise results. At the same time, by using information share model this paper studies contribution of both markets to price discovery. In further research, we can extend the sample range and use high frequency intra-day trading data to study the price discovery function between two markets. In addition, the impact of stock index futures market to spot market are varied, a large number of problems such as liquidity and volatility still call for further study and analysis.