Investigation Of Price Discovery Function And Volatility Between Index Futures And Stock Index Market

On April16,2010, the CSI300(China Securities Index300) index futures formally launched in China Financial Futures Exchange, the launch of which run a big step of the reforms and innovations of domestic capital market after years of arguments. So far, the CSI300index futures’trading has been running for nearly two years. According to the both the number of accounts and the volume of transactions, stock index futures market has become increasingly active. In the end, what kind of impact of do CSI300index futures have on China security market? Do CSI300index futures play theirs theoretical functions, such as price discovery, risk aversion and so on? How could we make better use of such financial derivatives to promote capital market’s development? These problems have always been focus of academics, executives, and investors.After the introduce of trade mechanism in stock index futures market, this Paper uses the closing price data of CSI300index 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 E-G co-integration test show that the two time series are unstable, but there is 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 (VEC) and finds that both of the CSI300index 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.The researches of stock index futures’effects on securities spot market focused on whether the introduction of stock index futures make spot market’s volatility increasing. And academics have conducted extensive researches on this problem from the birth of stock index futures. From the existing research results, we could group them into four types:The introduction of stock index futures increased spot market volatility, the introduction of stock index futures reduced spot market volatility, the introduction of stock index futures did not affect the spot market volatility, and the introduction of stock index futures had complex impacts on the spot market volatility. It can be noticed that, at present, there are theoretical and empirical differences on researches of relationship between stock index futures market and spot market. What’s more, since CSI300index futures have not run for a long time, the literature of the subject of CSI300index futures is lack. And most of the existing literature is about study of the existing stock index futures in Europe, America, Japan and other developed economies. While, thanks to China securities spot market’s "T+1" system and price limits, the study of CSI300index futures’impacts on China securities market under such a specific trading system is of practical significance.Then, to examine the impact of CSI300index futures on the volatility of the securities spot market, this paper modifies ARCH race models by adding a dummy variable to characterize the launch of CSI300index futures. Empirical analysis, using the64-day transaction data of daily and minutely frequency, show that CSI300index futures increase CSI300spot market’s volatility slightly in short term. The paper analyzes long-term effect empirically using892-day transaction data and the result shows that in nature CSI300index futures does not significantly increase or decrease the volatility of the CSI300spot market. This paper also use TGARCH models to analyze transaction data before and after the launch of CSI300index futures respectively and empirical results show that, after the introduction of CSI300index futures, leverage effects in CSI300spot market disappeared, which indicates that CSI300index futures plays the function of hedging effect, increases market liquidity, and reduces market panic. This is the meaning of the introduction of CSI300index futures.At last, in summing up the results of an empirical study, this article refers to the deficiencies, and proposes recommendations, including strengthening investors’education related to the stock index futures and financial derivatives, accelerating the entry of institutional investors, strengthening the supervision on the financial market, providing preferential policies and so on.Because CSI300index futures were 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 function, 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 spillover still call for further study and analysis.