The Empirical Analysis On The Function Of Avoiding Risks For Stock Index Futures Market In China

With the problems such as the rising inflation, a strengthening Renminbi, the repatriation of hot money and so on, the Chinese economy faces many uncertain factors, especially the capital market which might be affected by various risks. Therefore, what is focused by most investors is how to avoid capital market risks. The trading of stock index futures was introduced by Chinese Financial Futures Exchange on April16th,2010. It refers that an effective instrument for avoiding risks of the stock market might be selected by investors.What is focused by them is how to evaluate the influence of stock index futures listed on stock market. There are two main cases. One is that stock index futures is beneficial for the stock market to run steadily. It would be an effective instrument for avoiding risks. The other is reversed. Stock index futures is always be used for arbitraging, which intensifies the fluctuations of stock index instead of avoiding the price risks. This paper aims to explore the effectiveness of arbitraging by stock index futures. Firstly, whether there has been a long-term equilibrium relationship between the stock market and the stock index futures market. In other words, the two markets’prices fluctuate continually and affect each other, and ultimately the stock market price coincides with the price of the stock index futures market. Because the long-term equilibrium relationship is the precondition and the guarantee for the effectiveness of the function of stock index futures market which is avoiding risks. Secondly, making a judgment on the fluctuation of stock market influenced by the volume of stock index futures. Thirdly, the Shanghai and Shenzhen300Index futures is the unique trading species in the market of China. The quantity of trading species can not satisfy the investors’demand of avoiding risks in stock index futures market, which may bring more technical difficulty for hedging. So it is necessary to evaluate the function of stock index futures market by measuring the effectiveness of arbitraging by stock index futures.In the empirical analysis, Shanghai and Shenzhen300Index and IF Index are selected as the indicators for the price of the stock market and the stock index futures market to explore the relationships between the two markets. It is indicated in the research that there has been a long-term equilibrium relationship between the two markets, and the stock market price coincides with the price of the stock index futures market which is the precondition for hedging. What’s more, for a short time, changes in prices of the two markets might be in a disequilibrium condition, which indicates that the price volatility of the stock index futures market is more fiercely than stock market in the same economic environment. Meanwhile, the price of the stock market would fluctuated fiercely caused by the abnormal changes of the volume of stock index futures market. And the volatility of stock index doesn’t play an significant role in determining the volume of stock index futures. This conclusion indicates that the demand of hedging is insufficient and the function of avoiding risks for stock index futures market should be strengthened further.Based on the above analysis, traditional OLS model and GARCH(1,1) model are selected for evaluating the hedging effect of Shanghai and Shenzhen300Stock Index Futures. According to the research, GARCH(1,1) model has a better applicability and is available for reflecting the hedging effect of Shanghai and Shenzhen300Stock Index Futures.Accordingly, with the small number of opening accounts and the low proportion of institutional investors, more effort should be made to improve the conditions of stock index futures market gradually, such as regulations, systems, talents and technique, to realize the objective of regulators which is establishing a specialized market for institutional investors. What’s more, the Shanghai and Shenzhen300Index futures is the unique trading species in the market of China. The quantity of trading species can not satisfy the investors’demand of avoiding risks in stock index futures market, which may bring more technical difficulty for hedging. Therefore, the quantity of trading subjects should be increased constantly to improve the function of avoiding risks for stock index futures market.