Dynamic Roles Of Index Futures And ETF Options

As we know,financial markets are time-varying system,so as financial deriva-tives markets.Due to all sorts of reasons,the role of derivati\ves can varying all the time.Although roles of CSI 300 index futures on spot market,in terms of price discovery and volatility spillover effect,have been actively studied over last several years,potential limitation still exists:most studies before mainly focus on the static state other than how their role change dynamically.These topics are more relevant now due to their practical significance and the nature of price discovery and volatility themselves which varies over time.Besides,the intro-duction of European style equity options—SSE50 ETF options in 2015 in China marks a landmark moment in the development of its financial markets.Despite the attention and curiosity drawn by the initiation of stock options trading in China,research into the competitiveness of the SSE50 ETF option instrumen-t versus stock trading is non-existent,let alone its time-varying characteristics.A clear picture of how the CSI300 index futures and SSE50 ETF options have performed since initiation is essential for both investors and regulators.In the year 2015,the "abnormal fluctuations" in Chinese stock market casts a spotlight on the financial derivatives.Except the blames on them,several questions also come up:Since their initiation,how their roles evolved as time went on?During the "abnormal fluctuations" in the year 2015,how their role have changed,and why?These motivates our research.Our main findings are summarized as follows:1)Will the frequency of data exercise a large impact on the results of CSI300 index futures' price discovery?The empirical results show that the accuracy and degree of futures' price discovery(Information Share)go after the frequency of data employed.We believe when the higher frequency of data is used,the more precise and timely trading activities will be captured.Since a higher percent-age of institutional investors trade in futures market than in the stock market,more informed trading behavior of institutional investor in futures market can be preserved,leading to a higher degree of futures' price discovery.2)Due to the results of 1),our study is based on data that includes intraday CSI 300 index prices and tick-by-tick transaction prices of the CSI 300 index futures.We run the information share model as well as VAR-BEKK-GARCH model at the 5-second frequency on each trading day,then across the entire sample period,to calculate the price discovery and volatility spillover effect.The daily results enable us to demonstrate the time-varying character of them.Our results suggest that the CSI300 index futures plays an important role of price discovery,persistently,despite an obvious drop in the year 2015.The statistical tests shows the decrease is significant,especially during the "abnormal fluctuations" time periods.Besides,we also study the influence of China Financial Futures Exchange(CFFEX)on the price discovery of CSI300 index futures.Results give an evidence that each time when the trading rule changed dramatically,there would be a significant impact on futures' price discovery,as is predicted.3)In response for blaming the stock market fluctuations on "volatility trans-mission from futures' market" we investigate the dynamic volatility spillover effect between two markets.Our results also provide evidence of an asymmetric bidirectional volatility spillover relationship between the CSI300 index and index futures,with significant return and volatility shocks transmitted from the stock market to the futures market,persistently.While in the year 2015 as well as in the "abnormal fluctuations",the volatility transmission from futures' market to stock market has decreased significantly according to our statistical analysis.4)In response for blaming the stock market collapse on "malicious short-selling" by speculators in the futures market,we do regression analysis by con-structing the trading activities proxies for the futures.Results show that the de-gree of futures market's activeness has a positive impact on its volatility spillover effect toward stock market,while the speculation activities in futures market have negative influence on its price discovery and the volatility spillover effect toward stock market.Besides,regression also demonstrate that after the regulatory re-strictions of CFFEX became effective,the influence from the futures market to the stock market has weaken.5)Research into the competitiveness of the SSE50 ETF option instrument versus stock trading is non-existent,we examine data from the outset of options trading in China.Results indicate that the implied volatility for puts and calls behave differently across time.After a steep market decline,the implied volatility is higher for puts than for calls.We find that implied volatility for deep in the money calls is very low after a steep market decline,while implied volatility for deep in the money puts is very high.These results show that Rubenstein's(1994)crash-a-phobia results documented for U.S.markets are not equally applicable to the Chinese market.6)Our investigation into price discovery is conducted by both the information share model of Hasbrouck(1995)and the information leadership share model of Putnis(2013).Results from the former model indicate that the option implied price failed to play a dominant role in the overall price discovery,with an average information share equal to 30.1%.However,as shown by Putnis(2013),informa-tion shares may lead to misleading conclusions in the presence of different noise levels in the two competing price series.Noise levels for equities and options like-ly differ,especially during the first year of options trading in China.Our results bear out this conclusion.Using Putnis(2013)information leadership model,we find that option prices contribute 49%to price discovery for equities in China,placing the informational role of options trading on equal footing with that of equity trading.One step further,we study the driving factors of options' price discovery,by constructing proxies representing options' activeness,leverage and speculation,etc.Results give us a clue that the leverage plays no role on options'price discovery,while the speculation does,negatively.Unlike the previous static studies,our research take the time-varying charac-teristic of financial markets and derivatives into fully consideration.Throughout the paper,we run models on each trading day,and retain every day's results for further deepgoing analysis.Previous static studies are not able to demonstrate how the roles of derivatives changed by statistics.One step further,based on the unique dynamic results,this study precisely investigate how the role of these derivatives changed and the driving factors behind them,by using statistically test and regression analysis.Dynamic research and further deepgoing investiga-tion based on dynamic results make our dissertation outstanding and meaningful.