The Price Discovery Of SSE 50 Index Derivatives

The SSE 50 index is one of the most popular indices for the Chinese stock markets,its derivatives cover ETF,index futures and ETE options.How does the trading of multi market derivatives affect the price discovery and formation of the spot market.How does the price discovery function of SSE 50 index futures and SSE 50 ETF option.During the abnormal fluctuations in the year 2015,how their role have changed and why? These motivates our research.This study investigates the dynamics of price discovery among SSE 50 index,SSE 50 ETF,SSE 50 index future,and SSE 50 ETF options.One-minute data is used to measure the relative rate of price discovery among SSE 50 index,SSE 50 ETF,SSE 50 index future,SSE 50 ETF options.We use Granger causality test,VECM model,impulse response analysis to study the lead-lag relationship of these four prices.Then,we use the permanent-transitory(PT)model and modified information share(MIS)model to study the price discovery of these four markets.Our main findings are summarized as follows:(1)In the sample period,there is a significant two-way Granger causality in the prices of the four derivative markets,and there is a cointegration relationship among the four price series,which has a long-term stable equilibrium relationship.(2)The analysis of the four market price discovery contribution shows that,in the whole sample period,before October 2015,the contribution of future and spot to price discovery exceeds the contribution of ETF and ETF options.Since China Financial Futres Exchange(CFFEX)implement the most stringent restrictions on stock index futures,the contribution of future to price discovery has an obvious drop.With the increase of ETF option market activity,the price discovery ability of ETF option is gradually improving,and it is dominant in the four markets,followed by spot index,and ETF and futures market share is the lowest.(3)Whether the whole sample or high or low fluctuation time,the price discovery contribution of leverage assets which are stock index futures and ETF options,is higher than that of ETF.Moreover,in the period of high volatility,the contribution of stock index futures and ETF options to price discovery will be higher.These results support the leverage effect theory that informed traders prefer to choose leveraged assets to trade.This study helps us to correctly understand the SSE 50 index derivatives market function,so as to improve the development of index of derivative securities market for China.The study can also provide guidance for the implementation of cross market arbitrage investors.