The Empirical Studies On Functions Of CSI300Index Futures

CSI300index futures was finally launched on April16,2010, which is a milestone in the history of China’s capital market. As a tool of hedging risk, it not only fills the gap of short-sale restrictions in domestic securities market, but also has significance in improving China’s capital market structure and solving the problem of secondary allocation of society wealth. The three basic functions of index futures are price discovery, hedging and speculation. Using the sample of CSI300index futures real transaction data in the recent two years, this study comprehensively analyses these three basic functions of CSI300index futures.To investigate the price discovery and volatility spillover effect between CSI300index futures and spot prices, this study uses VECM model and EC-DCC-(BV) GARCH model respectively. With the15-min and daily samples from April16,2010to August15,2012, the conclusions are as follows. Firstly, in the long run, CSI300index spot price is the leading indicator of price change in the whole system. CSI300index spot contributes to price discovery in the long run while CSI300index futures has such function in the short run. Secondly, there is a bidirectional volatility spillover effect between CSI300index futures and spot prices. The shock and conditional volatility of CSI300index futures price both strengthen the conditional volatility of CSI300spot index price, while those of CSI300index price weaken the conditional volatility of CSI300index futures price. At daily frequency, spot volatility spillover effect into index futures is stronger than index futures volatility spillover effect into spot, while such result is the opposite at intraday15-min frequency. Chinese index futures market doesn’t play a significant role in price discovery. It may be mainly attributed to the fact that CSI300index futures investors mainly aim at speculation, thereby often overreacting to the news in the short run. However, the price is bound to return to an equilibrium level in the long run.Optimal hedging ratio calculation is a key part of stock investors’hedging strategies. Using the daily sample of CSI300index futures and spot prices, this study employs static models (e.g., conventional naive hedge ratio, OLS, univariate GARCH, VAR, ECM) and dynamic models (e.g., CCC, VARMA-AGARCH, DCC, BEKK) to make market-timing hedging strategies during the synchronous and non-synchronous trading hours, respectively. The results show that hedging strategies conducted during the synchronous trading hours is more effective, the average values of hedging effectiveness being around3-4percentage points higher than those during the non-synchronous trading hours; hedging effectiveness of dynamic models is generally higher than that of static models; among static models, the OLS strategy is the best, while dynamic strategies, such as BEKK,and VARMA-AGARCH, have their own advantages. These results can be explained by several facts, for example, the correlation of index futures and spot prices is higher during the synchronous trading hours; dynamic models can more accurately describe the characteristics of price series and so on.Though speculation plays an important role in deciding the other functions of index futures, speculation in CSI300index futures continues to be understudied. Proposing that market anomalies are a theoretical basis of speculation, this study empirically investigates four calendar effects, i.e., intraday effect, day-of-the-week effect, overnight effect and day-of-the-month effect, existing in China’s index futures market; then, it constructs intraday program trading system and takes previous conclusions related with day-of-the-week effect as the filter to test the speculation function of CSI300index futures. The results show that there is a negative Monday effect in CSI300index futures market during the sample period; annualized return of index futures is still over50%after having deducted fees and slippages by price volatiliy breakout system and impulse system; taking into account the filter of day-of-the-week effect, effectiveness of speculation is found to be significantly improved. CSI300index futures market functions well in speculation during the initial two years.Finally, this study concludes based on the empirical results and comments on how Chinese index futures market functions in reality. Furthermore, it provides futures research objects and relevant advice.