The Empirical Research On Chinese Stock Index Futures Market Functions

Stock price index futures (it is in this paper referred to as stock index futures)is a kind offinancial futures which was developed by investors to avoid the systemic risk of stock market.Since the first stock index futures (the Value Line index futures) was born in1982, it hasexperienced a rapid development in the world. Due to the world financial trend driven anddomestic increasingly strong demands for stock index futures, the Shanghai and Shenzhen300stock index futures (it is referred to as CSI300index futures) emerged as times require, and wasofficially listed in China Financial Futures Exchange in April2010. Up to the present, the CSI300index futures market has a considerable size, and its impact on stock market and the entirecapitial market is increasing. Whether the CSI300index futures market is already mature, andwhether it has already fully play functions have been one of the hot topics in the financialacademia. Research on this issue is of great significance not only in the theory, but also providean objective and rigorous basis for regulatory authorities to make policies.There are mainly two kinds of basic functions of the stock index futures: price discoveryfunction and hedging function. The price discovery function of stock index futures refers to theprocess of stock changes for absorbing information, and finally return to the intrinsic value ofassets. The hedging function is to avoid the risk of price fluctuations in the spot market throughthe establishment of a portfolio of stock index futures market and spot market. In addition,because the stock index futures market is closely related to the spot market, the stock indexfutures market will have significant impacts on the spot market, which is mainly reflected in theprice guide from the stock index futures to the spot market, volatility and liquidity impact. Thispaper will make empirical analysis on the price discovery function, hedging function andinfluence on the spot market of CSI300index futures market based on reasonable economictheories and rigorous quantitative methods, and on this basis, put forward reasonable suggestions.This paper contains seven chapters. The first chapter is the introduction part, which mainlyincludes the research background and research significance, research methods, innovation andthe basic structure. The second chapter of this paper includes the review and summary of foreignand domestic related research literature. The third chapter of this paper elaborates the mechanismand the related theory of the function of stock index futures. The forth chapter of this paper takesempirical analysis on the price discovery function of CSI300index futures. The fifth chapter ofthis paper takes empirical analysis on the hedging function of CSI300index futures. The sixthchapter of this paper takes empirical analysis on the influences from stock index futures marketto the spot market, which was carried through price guide relationship, volatility and liquidityimpact. The seventh chapter of this paper gives reasonable suggestions on the basis of theconclusions of empirical analysis.The research methods used and the conclusions we have drawn in this paper are as follows:1. Research conclusion on price discovery function of stock index futures market. In theframework of the theory of mean reversion, if the deviations of stock index futures from itsintrinsic value show mean reversion in the long run, we can tell that stock index futures markethas price discovery function. We use STAR-GARCH model to take empirical analysis on theprice discovery function of CSI300index futures. The results show that, in the sample interval,the sample series of CSI300index futures month consecutive contract does not presentsignificant mean reversion characteristic, the price discovery function does not fully play. Thesample series of CSI300index futures second month consecutive, season consecutive andfollowing season contract does present significant nonlinear mean reversion characteristic, theprice discovery function is to a certain extent played, and compared to the second monthconsecutive contract, the season consecutive and following season contract have better functionof price discovery. Overall, the consecutive contractsof CSI300index futures with short termshave weaker capacity of price discovery than the contracts with long terms. That is to say, theindex futures market responses slowly to the information shocks and requires a longer time to discover price.2. Research conclusion on price hedging function of stock index futures market. Werespectively examine the hedging effectiveness of the investment portfolios between CSI300index spot market and CSI300index futures month consecutive contract, second monthconsecutive contract, season consecutive contract and following season contract under the staticand dynamic hedging model. The empirical results show that, the hedging effectiveness of thefour kinds of investment portfolios reach more than80%, and the hedging effectiveness ofinvestment potfolio consist of CSI300index futures second month consecutive contract andindex spot is the highest. It can be seen that China’s stock index futures market faces controllablebasis risk, and the price in stock index futures market fluctuates consistently with that in theindex spot market.3. Research conclusion on price guide from stock index futures market to index spot market.We test the price guide relationship between CSI300index futures market and CSI300indexspot market through Johansen cointegration test、Granger causality test、VECM test and impulseanalysis. The empirical results show that, the guide intensity from the four kinds of contract ofCSI300index futures to CSI300index spot market is stronger than the guide intensity from CSI300index spot market to the four kinds of contract of CSI300index futures. In addition,combining impulse analysis under VECM model with DCC-GARCH model estimation results,we find that there is significant positive relationship between volitality of CSI300index futuresmarkets and CSI300index spot market. Shocks from CSI300index futures market to CSI300index spot market last longer and have greater impact.4. Research conclusion on volatility impact on index spot market from stock index futuresmarket. We use daily return of CSI300index to measure price changes in CSI300index spotmarket, and the volatility of daily return of CSI300index to measure the volatility of CSI300index spot market. Under the framework of EGARCH model, we test the influence of theintroduction of CSI300index futures on the volatility of CSI300index spot market throughadding dummy variable. The empirical results show that, the introduction of CSI300index futures has significantly reduced the volatility of CSI300index spot market.5. Research conclusion on liquidity impact on index spot market from stock index futuresmarket. We use respectively use the depth of the market and the modified Illiquidity ratio tomeasure the liquidity of CSI300index spot market. Under the framework of GARCH model, wetest the influence of the introduction of CSI300index futures on the liquidity of CSI300indexspot market through adding dummy variable. The empirical results show that,after theintroduction of CSI300index futures, the depth of the market has been deeper, and the modifiedIlliquidity ratio has been lower, which mean that the liquidity of CSI300index spot market hasbeen improved.6. Combining the results of empirical researches in this paper, we take analysis on therestricting factors on the functions of CSI300index futures market, including the structure ofinvestors imbalance, contract design unitary and the defect of system design. We put forward onfeasible pathes to optimazie stock index futures market functions throughupgrading marketstructure, promoting system reformation and strengthen market supervision...