Research On Inverstor Heterogeneity And Investment Strategies On Chinese Index Futures Market

Many empirical studies have found lots of evident against rational personhypothesis and EMH since1950’s, such as investors are bounded rational and marketprice misreacts to information. Cognitive bias and belief heterogeneity bothcontribute to investor’s irrational reactions and those reactions in turn lead toinefficient pricing so that market price departures from the fundamentals. Indexfutures contract is very important for market liquidity and stable as the innovative andhedge tool. But investor’s behavior is vital for the index futures contract to play therole. At same time price inefficiency by investor’s heterogeneity leads to positiveinvestment opportunities and puts forward new problem for market governance.This thesis studied investor’s heterogeneity and the corresponding investmentstrategies’ on CSI300index futures market, so that to explain the mechanism howinvestor’s heterogeneity and structure interact to effect market price reactions, anddepict the difference between Chinese and foreign market, and also to provideexperience for the establishment of new financial futures. Opportunities and profits ofcorresponding investment strategies were studied for investor’s heterogeneity leads toirrational volatility of futures price and in turn bring about unconventional investmentopportunities.Four levels of investor heterogeneity based on the definition by Campbell (2000)were studied, and the classification and evolution of heterogeneity, descriptivecharacteristics, numerical representation, ways of empirical research, and influence ofinvestor heterogeneity were systematically analyzed in research review and so that tolay the theoretical foundation of the research.Before empirical studies on misreaction, a general equilibrium model of indexfutures market was set up based on the interaction of investor heterogeneity andstructure, which predicted how the investor’s heterogeneity influences investor’sreaction to price information and in turn leads to misreaction of market price. Theexistence of investor heterogeneity was analysed by empirical studies both on theinfluence of investor emotion and misreaction respectively. Taking good light index asthe parameters of investor emotion, three hypotheses were inspected on the affectionsof investor emotion. Extreme value theory were adopted in the extracting of extremeinvestor emotion series so that to avoid arbitrary selection by2~3standard deviation from mean. Empirical studies were done on the intraday and daily misreaction ofindex futures return to special information.At last, non-arbitrage boundaries were set up based on different financing sourceand cost restrain so that to investigate the arbitrage opportunities and profits betweenthe CSI300index futures and spot market.Unique characteristics of futures market investor heterogeneity is found alongwith characteristics consistent with general stock market. Such as it is the interactionof investor heterogeneity and structure which influence the misreaction of futuresprice return and the investor who dominants in demand dominants under-reaction oroverreaction of the market price return other than who dominants in amount. Thefollowing numerical simulation on real transaction data proved the conclusions. Andit’s found that extreme short-time and middle-time investor emotion influence thevolatility of index futures price more than short-time investor emotion, which warnedthe regularity authority to be alert to small probability events and tail risk.Middle-time investor emotion is found to play important role in the price volatility,which implies the vital effect of institutional investor and fundamental information.Significant intraday price reversals are found and the strength of the intradayoverreaction seems more pronounced following large positive price changes overnight. And daily price momentum is not significant as expected as investorheterogeneity is time vary in a long time. It is a pity that those misreactions don’tpredict persistent profit as profits from momentum or contrarian strategies will begreatly reduced if transaction costs have been considered. It’s also found that there area lot of arbitrage opportunities by shorting futures contract and longing ETF fundsportion which can be explained by short sale constrain and risk premium theory. Thedegree of mispricing was opposite to the position/volume ratio, which means asignificant relationship between market pricing efficiency and investor structure.