Characteristics And Risk Control Of Chinese Gold Futures Market

January 9,2008, as pioneer of the stock index futures, gold futures contracts were formally listed on the market, It was the first real financial futures in China and drew the attention of the investors as soon as it was listed. However, several months later, most investors lost their money and left the market hopelessly. The market liquidity was extremely low. To change the situation, in March 2008, the China Banking Regulatory Commission approved commercial banks to enter the futures market dealing in futures transactions. Nevertheless, after the financial crisis swept the world, investors including commercial banks were frightened by financial derivatives. The liquidity was not improved. In July 2010, six departments including the People's Bank of China issued a file jointly requesting to develop the gold market to improve the competitiveness of the financial market and the ability to deal with crisis. In the file, it is requested to study the development rule of the gold market in depth and control the risk of gold futures. Therefore, it is practically significant to study the gold futures market characteristics and risk control.However, gold futures do not drew much attention from scholars in the academic area. There are very few related academic researches. Because of the short listing time of gold futures in China, there are seldom quantitative researches. Moreover, they have the defects of small amount of samples, simple models and not using the economic and financial theories to make in-depth analysis. The study adopted the financial time series method to create a complete measuring system for Chinese gold futures, putting an end to the scattered, partly and simple-modeled gold futures study. The study is a good model for other futures and will help improve the analysis approaches and risk control ability of the employees in the futures company and the investors.The main body of the article consists of three parts:Firstly, it applied unit root test, autocorrelation test and non-linear independent identically distribution test to verify the martingale weak-form market efficiency of the gold futures market. The result was unable to determine if the gold futures market was weak-form efficient. The author suggested adopting fractal theory for an in-depth verification and adopting mean equation and volatility equation respectively.Secondly, to discuss the external factors affecting the fractal character of gold futures market, the author adopted cointegration analysis, Error Correction Model, Granger Causality analysis and Impulse Response Functions to analyze the cointegration relation among the factors closely related to Chinese gold futures market. These factors included gold spot, USDX, Chinese stock market, COMEX Gold Futures, London Gold and Gold Lease Market.In the end, since the gold futures market is a fractal market, the risk control method based on Efficient Market Hypothesis is inefficient. The author adopted Extreme Value method and Expected Shortfall (ES) Theory to study the risk, focused on the huge loss of tail and created a risk control system for gold futures.Conclusions of the study:(1) In terms of the market itself, the gold futures market is not an efficient market but a market having fractal character and both mean equation and volatility equation have long memory character.(2) In terms of the external factors affecting the market, gold spot lead the price of gold futures. Therefore, the gold futures market does not play the price discovery function. USDX, Shanghai Stock Exchange Composite Index, Shenzhen Stock Exchange Component Index and Gold Lease all have no long-term equilibrium relations with Chinese gold futures. COMEX Gold Futures unilateral lead Chinese gold futures. London Gold and Chinese gold futures have bidirectional Granger Causality relations. The results further verified the fractal character of the gold futures market.(3) The market fractal character determines that the traditional VaR control method is ineffective. The article argued that the most scientific risk management method was to set the VaR calculated by the Extreme-Value-based BMM method and POT mehtod as ordinary risk value and the Expected Shortfall value as prudential risk value while taking into account the Return Level risk value to realize the control over these three lines. The innovations of the article included:firstly, it used the fractal analysis method semiparametric model SEMIFAR in Chinese gold futures study area, which allowed deterministic trend plus a random trend to exist in the time series. Meanwhile, long memory and short memory were taken into account, which was different from the past practice that only one trend was taken into account. Secondly, it introduced Return Level into the futures' risk control area. The Return Level is mainly used in Hydrology, Climatology and stock market. It was hardly applied in the area of futures. Thirdly, ES and mean-ES models were used in the area of Gold Futures, making up the defect that VaR assessment method was unable to assess the risk exceeding VaR. The author raised the idea of integrating the Extreme Value, ES and Return Level methods to control Chinese Gold Futures risk over these three lines for the first time. Fourthly, the core indicators of Gold Lease Market were set as the main influential factors on Chinese Gold Futures for a quantitative analysis. In addition, the research found out that USDX, Chinese stock market and Gold Lease Market did not have long-term equilibrium relation with the price of Chinese Gold Futures.