Empirical Study On Price Discovery In China’s Option Market And Spot Market

As an important part of the financial derivatives market,options began to flourish in the 1980 s.Many countries have actively introduced option products to manage risks and promoted the construction of multi-level capital markets.Overseas mature market has proved that option market has price discovery function and improves the market quality of spot market.For China’s emerging options market,we need to start from the actual situation of the domestic derivatives market,Combining with foreign research experience,this paper studies the price discovery of option market and spot market in China.It can not only reveal whether the market performance of China’s option has reached the expected level,but also provide valuable market information for market participants and regulators,and has important reference value for the design and launch of option derivatives in China.In order to explore the price discovery of option market and spot market in China,this paper takes the options market,ETF market and stock market as the research object,and selects the SSE 50 Index,50 ETF and 50 ETF option as sample data.And takes the impact of spot introduction on spot market price discovery as the starting point of research,takes the research of price guidance relationship among the markets as the leading factor,supplemented by the research on the price discovery contribution between markets.Firstly,based on the price discovery under the mean regression theory,this paper transforms the test of market price discovery into the test of market mean regression and selects four groups of sample data of SSE 50 Index,50 ETF before and after the launch of options.This paper builds a STAR model to analyze the change of price discovery function of ETF market and stock market before and after the introduction of options through the perspective of non-linearity.Secondly,this paper tests the nonlinear characteristics of the market by using six sets of sample data of SSE 50 Index,50 ETF and 50 ETF option and uses linear and nonlinear Granger causality tests to compare the differences in price guidance relationships between the three markets.Finally,this paper further uses ILS model to measure the contribution of price discovery in each market,and deeply analyses the price discovery between option market and spot market in China,and draws the following conclusions.(1)Overall,the launch of the SSE 50 ETF option has facilitated the price discovery function of the spot market.Before the introduction of options,the stock market did not have the mean regression feature,which was manifested by the lack of stock market price discovery function.After the launch of the option,both the ETF market and the stock market show a mean regression feature,indicating that the spot market has a certain price discovery function.This shows that the introduction of the SSE 50 ETF option has improved the price discovery mechanism in the spot market and the quality of the spot market.(2)In terms of segments,the price discovery of ETF market is higher than that of stock market before option launch,and after option launch,the price discovery of stock market is higher than that of ETF market.This paper finds that the promotion effect of option on price discovery in stock market is greater than that of ETF market.Compared with ETF market,the listing transaction of SSE 50 ETF option is more conducive to improving the market quality of stock market and promoting the function of stock market.This paper argues that option trading may significantly reduce the volatility of the stock market and increase the trading volume and activity of the stock market.Although ETF market has low-cost trading,if the stock market index is affected by some major components of the transaction cost is particularly active,it will show that the price discovery function of the stock market is high in the ETF market.(3)From the perspective of price guidance,there are obvious differences between the results of nonlinear Granger causality test and linear Granger causality test.The results of nonlinear Granger causality test show that there is a bidirectional price guided-relationship between option market and spot market.But the option market has a stronger price guidance effect on the spot market,and it is the main driving force in the process of price discovery,which is quite different from the one-way price guidance option market price obtained by linear Granger causality test.However,for the price guidance relationship between the two spot market,whether linear or nonlinear Granger causality test,ETF market and stock market can guide each other,and there is no obvious difference in the ability of guidance.Regarding the price guidance relationship between the two spot markets,whether linear or nonlinear Granger causality test,this paper finds that ETF market and stock market lead each other,and there is no obvious difference in the guidance ability.(4)From the perspective of price discovery contribution,the price discovery contribution of option market is far greater than that of spot market.This paper uses ILS model to calculate that the contribution of price discovery in option market is much greater than that in ETF market and stock market,which is contrary to the result of IS model that spot market has stronger price discovery function.Moreover,option transaction costs are lower and operating efficiency is higher in theory.Derivatives market contains more updated and more information than spot market,and price discovery ability is stronger.It can be concluded that China’s option market plays a leading role in price discovery.Although spot market price has price discovery function to a certain extent,the price discovery ability is weak,which is consistent with the conclusion that China’s option market has a strong price discovery function at the level of price guidance.