Market Liquidity And Flow-driven Risk Of Index Futures In China

If trading demand affects the value of the assets,fluctuation in that demand induces a component of aggregate risk which is named flow-driven risk.Using high frequency dataset of CSI 300 Index Futures,this dissertation decomposes the aggregate risk into a component—flow-driven risk—driven by the impact of net market orders and a component unrelated to net orders,and analyzes the dynamics properties and implications of flow-driven risk.In an identified simultaneous equation system,it is found that flow-driven risk accounts for 60%of market variance with the specification of time-varying price impact,which has a great impact on market return of index futures.Influenced by the Chinese stock market downturn during the second quarter and the third quarter of 2015,China Financial Futures Exchange has implemented a series of restricted regulation on index futures,such as higher commissions of closing out the position taken on the same day and higher maintenance margin level,which deteriorate the market illiquidity of index futures market.With the effective half-spreads gauging the transaction cost of the investors,it is found that the daily illiquidity of CSI 300 Index Futures has increased to 5 times of the day before the beginning day of implementation.By the end of July of 2016,the average of daily illiquidity is as nearly 2 times as the regular period from August of 2013 to August of 2015.The intraday pattern of illiquidity suggests there is a significant rise of illiquidity 5 minutes ahead of trade termination called "Halting Effect".Furthermore,taking market return,net order flow,effective spread,volume,flow variance into the regression model,this dissertation gives the empirical result:the illiquidity variable stays relatively stable and lagged effective spread has a strong predictable power;high volume can activate the trading market of index futures and improve the market liquidity;flow variance and last period price volatility can be contagious,which affects negatively on market liquidity.