The Theoretical And Empirical Study On Arbitraging By Means Of Stock Index Futures

Stock Index futures, being one of the most crucial financial derivatives in the wave of financial innovation, refer to a symbol of a mature security market. Shanghai and Shenzhen 300 index futures, as the first financial derivative, had been authorized by the State Council, formally listing and exchanging on April 16th,2010. The event symbolizes a significant revolution for China financial industry. The function of short selling mechanism plays a positive role for institutional investors like funds, securities and others, as an effective risk-controlling tool.Arbitrage boasts its important position among the three main purposes of Stock Index future investment consisting of arbitrage, hedge and speculation. It is partly because arbitrage provides investors a controllable return, overthrowing traditional sell-after-bought investment process. It is also partly due to functions of price correcting and stabilizing & liquidating for security markets. Study of Stock Index futures has a profound theoretical and realistic contribution in light of inadequate study of the relevant area in China.Based on analysis of two conventional arbitrage strategies---time arbitrage and price arbitrage, the paper respectively exemplifies open-ended funds with advantage for abnormal return and closed-end funds with high discount to prove that it is possible to make Alpha arbitrage between Shanghai and Shenzhen 300 Index Futures and the securities with abnormal return, and arbitrage between Shanghai and Shenzhen 300 Index Futures, and also value underestimated securities. The author further conduct extended exploration respectively aiming at those two strategies. Finally, the paper analyzes potential risks of Stock Index futures in arbitrage and also puts forward valuable suggestions.