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

Trading strategy and behavior of various investor types between spot and futures market: evidence from Thailand

In rational, efficient market, returns on derivative and underlying securities should be perfectly contemporaneously correlated. Due to market imperfections, one of these two markets may reflect information faster. The thesis analyzes the lead-lag relationship between the spot market and futures market, SET50 index and its futures contract, for the Thailand market. Various econometric tools like unit root tests and the Error-Correction Model (ECM) were employed in the study. The Augmented Dickey Fuller tests employed in the study proved that both the selected markets were stationary series after first difference and the Granger Causality test proved unidirectional relationships between these markets. On the daily observations basis, the results show that there is a price discovery for the futures index. In other words, the lagged of changes in spot price has a leading effect to the changes in the futures price. Alternatively, the TDEX is used instead of the SET50 index to see any changes in the lead-lag relationship. The result proves that there is a leading effect between TDEX and SET50 index futures. The ECM, which utilizes the traditional linear model, is considered to be the best forecasting model. The trading strategy based on this model can outperform the market even after allowing for transaction costs. Moreover, this thesis studies the trading patterns of each investor type, which are foreign investors, institutional investors, and individual investors by using detailed records of trading activity, trading volume, and trading value by employing a unique data set of daily aggregated purchases and sales on the Stock Exchange of Thailand (SET) and the Thailand’s derivative market. The results show that the buying and selling investment flows of these three investor groups are ranked as follows; the majority trader in the Stock Exchange of Thailand (SET) is the individual investor, followed by the foreign investor, and the institutional investor. The corresponding ranking in the Thailand’s Derivative Market is the individual investor, then the institutional investor, and the foreign investor is the minority trader. The results provide empirical evidence that foreign investors were net buyers whereas institutional investors and individual investors were net sellers of equities in both the spot and the futures market of Thailand. For the feedback-trading pattern, the results show that in both the spot and the futures market; foreign investors are positive feedback or momentum traders. While, individual investors tend to be contrarian investors, or negative feedback traders. Institutional investors’ trading pattern in both spot and futures market is rather mixed results. Furthermore, the results show that foreign investors’ herding is positively correlated with institutional traders in spot market, while negatively correlated with institutional investors in futures market. Foreign investors’ herding is negatively correlated with individual investors in both spot and futures market. Institutional investors’ trade flow is positively correlated with individual investor in futures market whereas it is negatively correlated with individual investors in spot market. In addition, this thesis studies trading performance of various investor types, which are foreign investors, institutional investors, and individual investors on the Stock Exchange of Thailand (SET) and Thailand’s derivative market. The results reveal that different investor types can have different performance. Foreign investors who are more likely to have information advantage over other type make minor overall net trading gains in the futures market, their gains arise from the good market timing but likely to incur large losses in the spot market from negative price spreads between sell and buy prices. Individual investors in the spot market experience positive return, they have success in performance from price spread whereas they experience poor market timing return. Moreover, the results exhibit that individuals make losses on their trade in the futures market. Specifically, the results show that institutional investors make overall net trading gains from positive price spreads between sell and buy prices in both spot and futures market. The different performance might be due to mixed effect of the trading gains and losses arise from trades between investor types that have different backgrounds

Volatility-volume co-movements: evidence from China metal markets

This paper investigates the interactional relationship between price volatility and futures trading activity for three heavily traded metal products on the Shanghai Metal Exchange and the Shanghai Futures Exchange. Using models based on vector autoregression and generalized method of moments we show, in particular, that futures trading activity has a strong impact on both spot and futures price volatility in copper and aluminium markets. Futures trading activity leads spot market volatility in copper and aluminium markets which suggests that futures markets have a destabilizing effect. In order to disentangle the effect of different traders’ types on asset price movements, we decompose futures trading into speculators’ and hedgers’ trading and investigate their contributions to volatility. As a robustness check, we investigate the impact of endogenous structural breaks on the interactional relationship between price volatility and futures trading

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

Asset Pricing, Investment, and Trading Strategies

Asset pricing, investment, and trading strategies are very important in finance. They are useful in various situations, for example, supporting the decision-making process of choosing investments; determining the asset-specific required rate of return on the investment; pricing derivatives for trading or hedging; getting portfolios from fixed incomes or bonds, stocks, and other assets; evaluating diverse portfolios; determining macroeconomic variables affecting market prices; calculating option prices; and incorporating features such as mean reversion and volatility, etc. They can also be applied in financial forecast for assets, portfolios, business projects.Understanding, modeling, and using various asset pricing models, investment models, and models for different trading strategies is paramount in many different areas of finance and investment, including banking, stocks, bonds, currencies, and related financial derivatives. Different asset pricing models, investment models, and models for different trading strategies also allow us to compare the performances of different variables through the analysis of empirical real-world data.This Special Issue on "Asset Pricing, Investment, and Trading Strategies” will be devoted to advancements in the theoretical development of various asset pricing models, investment models, and models for different trading strategies as well as to their applications.The Special Issue will encompass innovative theoretical developments, challenging and exciting practical applications, and interesting case studies in the development and analysis of various asset pricing models, investment models, and models for different trading strategies in finance and cognate disciplines

Analyzing frequent acquires in emerging markets and futures markets linkage

The first chapter of this dissertation examines the returns to frequent acquirers from emerging markets and analyzes the cross-country variations in cumulative abnormal returns. The sample consists of 5,147 transactions carried out by firms from 17 common and civil-law countries during the period of January 1985 to June 2008. I find that the cumulative abnormal returns decline over the deal order and it is more pronounced in civil-law countries than in common-law countries. There is also evidence that the premiums paid by acquirers from civillaw countries with a first successful acquisition are higher than those from common-law countries. These findings are consistent with agency problems and the hubris hypothesis, first introduced by Roll (1986). The second chapter examines the information links across futures markets in different nations, using Vector Autoregressive (VAR)-Dynamic Conditional Correlation (DCC) model. The data comprise a large set of commodity and financial futures traded in U.S., U.K., China, Japan, Canada, and Brazil during the period from August 1998 to December 2008. The primary finding is that market interactions are relatively high for commodities for which information production generally is more diverse (metal commodities), while moderate for commodities for which information is more concentrated (agricultural commodities). Furthermore, the strength and persistence of interactions among futures markets decline after excluding the most informative markets. These findings indirectly support the breadth of information being a relevant factor in the extent of information linkage. The results also indicate that the dynamic correlation in futures markets is high in most commodity and financial futures if there is a significant bi-directional return and volatility spillover. Additionally, I estimate a market’s contribution to the price discovery process. In general, the market that has a stronger price impact and a stronger volatility spillover tends to be the market that has greater contribution or leadership in price discovery

Modelling dynamic financial linkages, spillover effects and volatility transmissions: empirical evidence from China and international financial markets

Over the last two decades, there has been a considerable change in the economic performance of China, making it the world’s most powerful emerging market and the second largest economy in the world. China’s stock market is now well developed and strongly influenced by global economic factors, regional financial development in Asia and local economic growth in China. Many crucial economic and financial reforms have been implemented, making the Chinese stock market more open to the world. Two well-established stock exchanges, based in Shanghai and Shenzhen are now operating with significant interdependence with other financial markets around the world. The degree of market co-movements is an essential factor for determining the diversification opportunities across different financial markets. International stock market linkages have been extensively examined by empirical literature, suggesting that financial market integration is able to influence market co-movements. Given the increased market integration between China and other financial markets, this thesis investigates the dynamic financial linkages, spillover effects and volatility transmissions among different financial markets within China and between China and global markets, as strong interdependence among financial markets could lead to higher exposure to contagious effects when one market experiences a serious crash. Furthermore, this study also provides important practical implications for investors, portfolio managers and policy-makers based on the empirical findings. The primary objective of this study is to investigate the nature and extent of market interdependence among the Chinese stock markets, the Chinese financial derivative markets and international stock markets. Various advanced econometrical models, including Vector Autoregression (VAR) models and Generalised Autoregressive Conditional Heteroscedasticity (GARCH) models, will be used to explore both return and volatility transmission mechanisms between different financial markets from China’s perspective. In order to achieve the key objective, this study conducts four inter-related research undertakings as follows: 1. An examination of spillover effect between the Shanghai and Hong Kong stock markets while evaluating the impact of the recently introduced Shanghai-Hong Kong Stock Connect; 2. An investigation of financial linkages, information transmission and market co-movement in the Asia-Pacific region; 3. The work further considers dynamic relationships between the Chinese stock market and its index futures market while evaluating the influence of Qualified Foreign Institutional Investors (QFII) scheme; and 4. An evaluation of dynamic spillovers among global oil price, equity and commodity markets in the Chinese region. The purpose of the first empirical focus is to investigate the impact of Shanghai-Hong Kong Stock Connect by analysing the dynamic interdependence between the Shanghai and Hong Kong stock markets. High-frequency data are used to deeply examine the price movement and volatility behaviours of the two markets. The newly introduced Stock Connect initiative contributes to the increasing importance of the Chinese mainland stock market. Particularly, the increased conditional variances in both stock markets together with a weak and unstable cointegration relationship are observed following the introduction of Stock Connect. The observed strengthened volatility spillover effect from Shanghai to Hong Kong indicates a leading role of the former over the latter after this financial liberalisation reform. Overall, the empirical results suggest that the opening of Chinese mainland stock market could enhance the leading power, influence the risk level and improve the market efficiency of the Shanghai stock market. The success of the Shanghai-Hong Kong Stock Connect initiative provides valuable operational experience for the forthcoming Shenzhen-Hong Kong Stock Connect. In this way, the Chinese government should continue liberalising its financial markets to improve their market efficiency. In the second empirical study, the price and volatility dynamics between China and major stock markets in the Asia-Pacific region around the Chinese stock market crash of 2015-2016 are analysed. Based on our estimation results of the Bayesian VAR and BEKK GARCH models, this study finds that price and volatility spillover behaviours are different during stable and stress periods. In particular, price spillovers from China to other regional markets are more significant during a bullish period, showing that ‘good news’ emanating from China has stronger impacts on its neighbours when China’s market increases. In the turbulent period, strong shock spillover effects from China to most Asia-Pacific stock markets and the enhanced volatility spillovers from China to the Asia-Pacific region are observed, implying an increasing degree of market interdependence across regional markets and the importance of China as a strategic financial centre in the region. The Asia-Pacific stock markets are also found to spill over their shocks to China during the crisis, showing that China is becoming more integrated with the regional financial markets. The impact of the Qualified Foreign Institutional Investors (QFII) reforms on the dynamic relationship between the Chinese stock index futures and spot markets is further examined. 5 minutes high-frequency data together with various dynamic methods including VECM, GJR, BEKK and DCC GARCH models are employed to investigate the price discovery role and volatility spillover effect. This study finds a bi-directional asymmetric lead-lag relationship between the Chinese stock index futures and its underlying markets, indicating the futures market leads the spot market significantly, but there is a weak lead from the spot market to the futures market from the perspectives of both magnitude and lasting time. It is observed that the introduction of the QFII has enhanced the price discovery role of the futures market and increased the predictive power of the futures market. In addition, the Chinese stock index futures market is found to become less volatile (risky) and probably more efficient after the introduction of QFII. The enhanced volatility spillover effect from the futures market to the spot market is evident after the participation of foreign institutional investors in trading stock index futures contracts, suggesting an improvement in information transmission running from the futures to the spot market. The dynamic conditional correlation between the futures and spot markets decreases and becomes more volatile after the introduction of QFII, implying that the futures and spot markets become less correlated after the QFII. Finally, the thesis provides a comprehensive analysis of dynamic spillover effects among the Chinese stock market, the Chinese commodity market and international oil market. Using a trivariate VAR-BEKK-GARCH model to estimate market volatility and its interactions, this study finds significant uni-directional return spillover effect from oil market to stock market, suggesting a strong dependence of the Chinese stock market on the oil market. The analysis results also indicate significant uni-directional return interaction from the Chinese stock market and global oil market to some key commodities in China. In particular, significant return contagions from the Chinese stock market to copper and aluminium futures and from oil market to silver, copper and aluminium markets are observed. The non-existence of return spillovers between gold and stock (oil) suggests the safe-haven role of the gold. In terms of the volatility spillovers, this study finds bi-directional shocks spillovers between oil and stock markets but uni-directional volatility spillovers from the oil market to the Chinese stock market. For commodities, the results show evidence of strong uni-directional shock and volatility spillovers from the stock market or oil market to some commodities. However, there are no spillover effects from all the commodity markets to either the stock market or oil market, meaning there are potential diversification benefits from the Chinese commodity markets. Finally, important implications for portfolio management and hedge strategy are provided. This research makes significant contributions to the empirical literature on the financial linkages and volatility transmissions by empirically examining the influence of several important Chinese financial liberalisation reforms and comprehensively analysing the dynamic interdependence between the Chinese stock market and its interrelated financial markets. Since understanding information transmission between financial markets is critical for both market participants and policy-makers, the results of this thesis will help to facilitate an enhanced understanding of information transmission mechanism and risk contagions. As volatility contagions greatly affect smooth functioning and economic viability of financial markets which are the major concerns of investors and policy-makers, therefore a better understanding of the drivers and origins of market volatility can assist them in the decision-making process. Policy-makers may also use this information to introduce new financial instruments, propose prudent financial regulations and implement policy tools in a timely manner. In addition, important practical implications can also be drawn from this thesis. As the findings of this thesis indicate more integration between the Chinese stock market and other markets, these markets have become more interdependent and improved their efficiency in terms of market information transmission. In addition, the increased level of financial integration also underpins cross-borders capital flow and international investment which are key drivers of local economic growth and fosters international risk management for portfolio optimisation. Consequently, it is suggested that investors and policy-makers actively monitor market movement and the degree to which China’s financial market is integrated. This will make it possible to predict future returns and volatility of other inter-related markets

The commodity future investment with the impact of Chinese specific factors

This thesis explores the commodity futures investment strategy with the impact of the Chinese specific factors. First, I study the so called Chinese specific factors. To do so, I investigate how commodity future price interacts with domestic macroeconomic variables and overseas futures prices respectively. Specifically, Chapter 2 emphasizes the interaction between domestic commodity futures prices and domestic macroeconomic variables such as interest rates, monetary growth, exchange rates and industrial growth. Among these variables, monetary growth should receive deeper attention because it is widely regarded as the main channel of monetary policy transmission. Subsequently, Chapter 3 focuses on the interaction between domestic commodity futures prices and overseas commodity futures prices. Having gained a clear understanding of the Chinese specific factors, a dynamic timing strategy is accordingly proposed in chapter 4. Chapter 2 is primarily focused on the interaction between domestic macroeconomic variables and domestic commodity future price movement. Specifically, I try to explore whether low (high) interest rates, loose (tight) money supplies, low (high) foreign exchange rates (Renminbi / US Dollar rate) and high (low) economic growth will lead to high (low) commodity prices and whether commodity prices present overshooting behaviour in response to the interest rate, money supply or changes in the foreign exchange rate. It has been argued by Frankel (1986, 2006) that commodity prices tend to overshoot in response to interest rates as well as to changes in the exchange rates based on Dornbusch’s (1976) model. Evidences from the SVAR models show that part of the theory regarding the relationship between macroeconomic variables and commodity price movement can be supported. The empirical also results suggest that the commodity price shock itself make the largest contribution to commodity price shocks in general. An interest rate shock barely contributes while an M1 growth shock contributes substantially in metals. Foreign exchange rate shocks contribute approximately 40 percent to some commodities, while industrial output shocks comprise approximately 20 to 30 percent to some metals. In chapter 3, the thesis tries to explore the impacts between China’s futures market and overseas futures markets in chapter 3. Research from this angle could help reveal which side has stronger pricing power. Specifically, I aim to study the information spillover effect between the domestic spot and futures market as well as the information and risk spillover effects between the domestic metal futures market and the overseas metal futures market. Moreover, to check whether China has gained pricing power in the global commodities market, I also study the risk spillover effect between the domestic metal futures market and other overseas financial markets. From the empirical evidences in Chapter 3, it could be seen that asymmetry factors are significant in the futures market, no matter in the Chinese market or oversea market. The empirical results of Granger causality test in Chapter 3 show that movement in the SHFE market could directly guide movement in the LME market, indicating a rise in China’s pricing power in the global commodity market. However, such pricing power is limited and should not be wildly exaggerated. Chapter 4 forms an effective dynamic timing strategy in China’s commodity market with full consideration of the Chinese specific factors. I adopt Vrugt, Bauer and Molenaar’s (2004) dynamic modeling approach to predict the sign of monthly returns for the three metal futures listed on the Shanghai Futures Exchange: copper, aluminum and zinc. Following Vrugt, Bauer and Molenaar (2004), the base set of explanatory variables is classified into three categories: 1) business cycle indicators; 2) monetary environment indicators; 3) indicators of market sentiment. The empirical results in Chapter 4 show that the timing strategy can offer better returns, a lower standard deviation and, as a consequence, a higher information ratio for all three metal futures