The Impact Of Introduction Of CSI300 ETF On Pricing Efficiency Between CSI300 Spot And Futures Markets

Since the CSI300 index futures’contract has been on the market, it suffers a lot from absence of a proper spot counterparty. Its participants are in pressing need of a corresponding spot market in order to gain profits from arbitrage or to avoid risk by hedging. The introduction of Huatai CSI300 ETF and Jiashi CSI300 ETF has filled the gap, enhanced both spot and futures markets’liquidity and fulfill the need of various financial institutions, especially for hedge funds and investment banks. As the corresponding ETF for one of the most important index in Chinese A-share market as well as the sole corresponding underlying asset for Chinese CSI300 index futures’ contract, it’s constituted by stocks enlisted across Shanghai and Shenzhen Stock Exchange, thus making us curious of the influence it may impose on the spot-futures market in price discovery process and its investment value as a financial product in terms of profit and risk.This paper creatively employs a smooth transition vector error-correction model based on regime transition models to study the dynamics of predominant role in spot-futures relationship after a brief description of CS1300 ETF, CSI300 index and CSI300 index futures. Then we apply the residual series of STVECM to a statistical arbitraging strategy to study its return features based on co-integration regression and try to use Copula-VaR based Modified Sharpe Ratio to stand as the robustness test for the strategy’s performance.Our empirical analysis show that, although the leading role of CSI300 index futures in spot-futures relationship has not been overturned,the introduction of CSI300 ETF, both Huatai and Jiashi. has significantly reduced heterogenicity and improved pricing efficiency in each market. Our results also show that the CSI300 ETF behaves well in terms of both making profit by arbitrage and avoid risk by hedging without consideration for transaction costs. Otherwise, the return of statistical arbitrage will be nibbled away. As for robustness test, there will be 0.5 unit profit against 1 unit VaR...