Research On The Selection Of The Underlying Index For Index Futures

Before the establishment of index futures in China, the biggest issue people may concern is that the index futures might increase the riskiness of the market. We might have different visions and different methods of trading risk control of the market, however choosing an optimal underlying index act the most important and fundamental role in risk control. Therefore, an appropriate selection of the underlying index for the Chinese market is the key argument of this article.First of all, game theory methodology will be introduced into the selection of underlying index, and we try to explain why hedgers and arbitragers are crucial to the index futures market in China. The reasons to encourage these two kinds of investors are that, they will increase speculators'transaction cost as well as restricting speculators from destabilizing the market. However, they would not affect the cost of regulation management. Therefore, an optimal index futures product with efficiently risk control must be benefit for hedgers, arbitragers and speculators.In chapter 4, we focus on the participators in index futures market, and the role of the game theory, thus establish a game theory model which connect with players in the futures market.In chapter 5, we investigate on the change in volatilities, liquidity and estimation of the spot market after the accomplishment of index futures in oversea markets. We conclude that the issue of index futures does not essentially change the feature of the spot market. Therefore, the analysis of this report on futures index is evidently significant.In chapter 6, we discuss the choosing of underlying index for hedging purpose in China, including the structure of investors in China, A-share systematic risk analysis, hedging theoretical models and their measure of performance, for testing the hedging performance of existing indices in China.In chapter 7, we discuss the choosing of underlying index for arbitraging purpose in China. This includes three parts, the dividend expectation of index components, the liquidity of index components, and comparing the advantage and disadvantage of different indices for arbitrage.In chapter 8, we discuss the choosing of underlying index for speculating purpose in China. This mainly research on indices volatilities, market-representative properties and operational properties. Finally we compare the advantage and disadvantage of different indices for speculating purpose and thus find a method to restrict them from over-speculating.In chapter 9, according to the argument from above chapters we find appropriate and essential factors for choosing an optimal underlying index and the suggestion for index futures contract design and construction.