The time-varying lead-lag relationship between index futures and the cash index and its factors

This paper investigates the time-varying lead-lag relationship between CSI 300 index futures and the cash index at intraday and daily frequencies under different market conditions, which is crucial in the price discovery research but rarely examined by the literature. Using a new method that is based on dynamic time warping and can capture the dynamic lead-lag relationship up to the intraday level, we find that index futures tend to lead the cash index by 0–5minutes but it occasionally lags the cash index, and this relationship is variably affected by factors according to market conditions. Specifically, at both of the intraday and daily frequencies, the lead of index futures decreases with market volatility and the relative intensity of trading activity of index futures. The results also unveil the asymmetric effects of overnight information from the cash market on the lead times of both index futures and the cash index at a daily frequency. Moreover, the synchronization of trading hours strengthened the link between the two markets. These results have significant implications for price discovery in these market

The Economics of CSI300 Stock Index Futures in China

Chinese financial markets play an ever more pertinent role within the global economic. In this thesis, we investigate empirically the efficiency and functioning of the Chinese Security Index 300 (CSI300) index future. While CSI300 index futures market is a relatively new market, it has attracted huge trading volume and liquidity as there is no other financial derivatives markets in China and the short-selling in the stock market is difficult. Therefore, it is important and informative to examine both the hedging effectiveness and price discovery ability of CSI300 stock index futures. This thesis presents one of the first attempts in empirically investigate the market efficiency and hedging effective of the Chinese stock index futures from 2012 to 2018. In particular, chapter 2 studies the hedging effectiveness of CSI300 index futures with both static and dynamic hedging methods. The results show that CSI300 stock index futures is an effective hedging instrument, and in general the performance of dynamic models are better than static models. In chapter 3, we analyze the price discovery contribution of CSI300 index futures market in the context of six relevant hypothesis and three empirical measures (PT/GG, IS, and MIS methods). The price discovery performance of Chinese stock index futures is found to be consistent with the other mature markets, indicating that new information that affects the fundamental value is reflected more quickly in the CSI300 index futures markets. Finally, using the efficient market hypothesis and unbiasedness hypothesis, CSI300 index futures is also found to be informational efficient in chapter 4. The market is partially efficient and the futures price is a constant risk unbiased predictor for the subsequent spot price in the long run. Different from previous literature which focus on the CSI300 futures and spot market, this thesis utilizes various data frequency and futures with different maturity to address the empirical issues regarding the functioning of CSI300 futures market. In addition, this thesis is the first study to the impact of regulation reforms in 2015 (when Chinese regulators strictly tightened the rules on trading stock index futures) on CSI300 index futures market. Finally, the performance of the CSI300 index futures market has been compared and evaluated with other more mature index futures markets around the globe. The findings of this thesis have important implications to market regulators and participants in developing more effective investment and regulatory strategies

Intraday volatility analysis of CSI 300 index futures: a dependent functional data method

This study introduces a new volatility model based on dependent functional data to investigate the intraday volatility characteristics of CSI 300 in the context of high-frequency data. The volatility curve is fitted and reconstructed using three methods: functional principal component analysis, Newey-West kernel, and truncationfree Bartlett kernel. We adopt a functional time series approach for short-term dynamic forecasting. The empirical results show that the proposed dependent functional volatility estimation model based on the long-term covariance of the truncated Bartlett kernel can accurately capture the intraday volatility trajectory and outperforms other models in terms of forecast accuracy and profitability. This study improves the volatility-related research methodology, which is conducive to discovering the price formation mechanism of the stock index futures market and improving risk management capabilities

Role of index futures on China's stock markets: evidence from price discovery and volatility spillover

Includes bibliographical references (pages 26-28).Published as: Pacific-Basin Finance Journal, vol.44, September 2017, pp.13-26, https://doi.org/10.1016/j.pacfin.2017.05.003.The introduction of stock index futures in China in 2010 marked an important development in the country's financial markets. It was however not without controversy as regulators blamed the futures market for its role in the stock market crash in 2015. This paper examines the intraday price discovery and volatility spillover relationship between the CSI 300 equity index and index futures in China. Results from the study, covering the period 2010–2015, reveal that index futures plays a dominant role in contributing towards price discovery, with an average yearly information share of about 67%. The price leadership of the futures market, although found to be strong, is diminished in the presence of stringent regulatory trading curbs that were put in place as a response to the crisis. Furthermore, investigation into volatility spillover documents significant return and volatility shocks transmitted from the stock market to the futures market. The evidence, which contradicts regulatory claims, is explained in the context of the unique institutional trading structure in China

Empirical study on the efficiency of the stock index futures market from the information and functional perspectives–empirical evidence from China

This paper studies the effectiveness of the CSI 300 index futures markets from the perspective of information efficiency and function efficiency and examines the nonlinear dynamic characteristics of efficiency by using nonparametric methods. For information effectiveness, we find that the price of stock index futures follows a random walk. For function effectiveness, the results show that (1) the average optimal hedge ratio is 0.8702, and the average effective level reaches 86.11%. (2) The error correction mechanism is only supported by stock index futures. The error correction effect only exists in the extreme regime (only 6% of the total observed value). Most of the time (94%), both prices are subject to random walk process. There is no arbitrage trade between futures and spots. (3) Both linear and nonlinear leadership are observed in stock index futures. The nonlinear leadership is mainly reflected in stock index futures. Both leadership types are influenced by institutional changes and significant financial events and evolve over time, which indicates that stock index futures cannot play the dominant role in price discovery. In sum, we conclude that the CSI 300 stock index futures market is effective, despite the flaws in price discovery

Price Discovery on Stock Index Futures markets under Extreme Events: Evidence from China

In this paper, the price discovery function of stock index futures for spot stock index is studied in view of the soaring and plunging periods of Chinese stock market in recent years. We use the VECM model to do empirical research under periods of stationary, boom and slump. The results show that there is a long-term relationship between CSI 300 index and CSI 300 index futures. During the stable period of Chinese stock market, the CSI 300 stock index futures are sensitive to the short-term impact, and its ability of price discovery is obviously. However, during the period of boom and collapse, the price discovery function of CSI 300 index futures is weak

Price Discovery in the Stock Index Futures Market: Evidence from the Chinese stock market crash

This paper examines time-varying price discovery of the Chinese stock index futures market during a stock market crash in 2015. We find that the index futures market plays a long-run leading role in terms of its higher static and dynamic generalised information share (GIS) than both the Shanghai and Shenzhen A share markets during the market turbulence. The expected trading volume in each market improves GIS of that market. The importance of trading activities by the majority of investors in increasing market efficiency during a crash is underscored. Government intervention on futures trading impairs price discovery in the futures market

The Impact of Underlying Market Closure on Futures Market Liquidity: Evidence from China

This study investigates the trading activity of Chinese stock index futures, recently introduced at the open and close of the underlying trading. We document the impact of the underlying spot on the futures market liquidity as well as volatility as discussed in earlier works on market closure theory. Our empirical results support previous literature on the impact of the underlying, particularly during the open session, as a contagion effect, which is clearly at play. We find significant U-shaped patterns in liquidity factors and intraday volatility during open and close trades in the morning

Volatility and skewness spillover between stock index and stock index futures markets during the crash period: New evidence from China

This paper examines volatility and skewness spillover between the Chinese stock index and index futures markets during a market crash in 2015. The volatility spillover from futures to spot is significant and stronger than the other way around. Moreover, the transmission of downside risk is bilateral with the futures market taking the lead. It is revealed that measures announced during the market crash to curb the speculative futures trading enhance the spillover of both volatility and skewness from futures to spot markets. This finding sheds light on validity of such measures to restore market efficiency during a stock market crash