Stock Index Futures, Risk Management Studies

Being the most successful financial innovation in the international financial market in1980s, stock index future has been one of the financial derivatives of best transaction and Liquidity and considered as the best tool to hedge systematic risk in stock market.Financial innovation results in new financial risks inevitably. The risk of stock index future market is characteristic of large scale, broad scope, magnification and complication. The reasons for risk mentioned above include the frequent fluctuation, the leverage of margin trade, irrational speculation and the unhealthy market mechanism. And the risk of stock index future directly result in the scandal of some financial institutions bankruptcy and huge losses with great influence and worst outcome in the financial history, such as the bankruptcy of Barings Bank in 1994 and the huge losses of SG in 2008.Under the background of continuous perfection of financial institution, it is over 2 years since the CFFE put forth the Simulated exchange of shanghai and Shenzhen 300 stock index in October 30 2006, and the actual transaction is not far away from. This paper attempts to study the reasons of stock index future, its character and the methods of relevant risk control upon the special Chinese Circumstance through theoretical and empirical analysis ,with reference to stock index future risk management in developed countries and regions such as Hongkong and Taiwan. Then this paper will systematize and summarize the research above so as to contribute to the healthy development of stock index future market.This paper attempt to answer the following questions through theoretical and empirical analysis: firstly, what kind of risks are there in stock index future market or, in the special Chinese market ? secondly, how to indentify these risks and the reasons for those risks? Thirdly, how to measure those risks and is it proper for the margin in the simulated exchange? fourthly, how to control these risks from the angle of government ,exchange, future companies and the investors and how to deal with these risks by way of reasonable supervision and information exchange? Last, this paper will suggest on the trans-market risk prevention and management in consideration of the feature of stock index future as a financial derivative and the connection of risk between stock index future and stock market.For the purpose of questions mentioned, this paper concludes the followings with reference to many theoretical and empirical researches on stock index future risk management as well as the cases and experience of stock index future risk management abroad:Firstly, stock index future risk is greater than other financial derivatives especially in China, where many factors influence the risk of stock index future significant macro-economic information leakage, low bonus, policy-oriented market and the competition from international stock index future innovation.Secondly, the reason for stock index future is complicated, of which micro reason consists of stock price fluctuation, leverage, and the macro reason consist of globalization of financial market, financial institutions monopolization and the freedom of financial development.Thirdly, in accordance with the shanghai and shenzhen 300 index, this paper calculates the VaR and ES with Extreme Value Theory and concludes the margin should between 7.3686-8.7920. Definitely, this paper thinks that this margin is merely for reference and the practice shall take more factors into consideration such as the fluidity of market, future changes, Spot market, margins rate of other exchanges.Fourthly, this paper set forth the methods of risk control on stock index future from the macro, meso and micro perspective, then points out that it is most significant to control the risk of future exchange arising from future exchange through meso-analysis.Lastly, this paper concludes though empirical analysis it is unlikely that the trans-market manipulation will take place in stock future in China with the aids of copula function. However, it is necessary to reinforce the market supervision in stock disaster and at the date stock index future mature. Moreover, it is necessary to prevent the trans-market manipulation through these measures such as the perfection of final settlement price rules of stock index future, adequate trans-market information sharing between stock market and stock index future market, the set up of trans-market exchange breaker, risk alert mechanism and emergent action plan for trans-market crisis.