A Study Of The Impact Of Stock Index Futures On The Cash Market

Stock index futures is a kind of financial futures that take stock index as underlying asset. Stock index futures possesses the ability of the price finding of the hedge speculate and so on. As a mature risk management tool, the transactions of stock index futures have been already flourishing in all developed capital markets. China mainland tested the stock index futures market on the early 1990s, but stopped soon. Since then the development of stock index futures market in our mainland come to a standstill for more than 10 years.As the time our mainland re-run the stock index futures market is approaching, the impact of the stock index futures market on the spot market become focus of people's attention. The topic of this paper focuses on the volatility impact of the stock index futures market on the spot market yet giving appropriate consideration on other aspects of the impact. The paper uses theoretical models to study the effect of the trade of the stock index futures that reduces volatility of the stock market. Then we carry out an empirical analysis using the data of Taiwan capital market. Finally we refine several particular problems to carry out further analysis combining with the model and give the conclusions then. The paper mainly has four parts.The first chapter mainly introduces the concepts, features and functions of the stock index futures and recalls the development of the stock index futures trade in the world's major capital markets especially including China's relevant part. In the second chapter, we survey the studies on whether or not the launch of the stock index futures will increase the volatility of the stock market and then give some comparison and comments. Most of the research done does not consider that stock index futures market will increase the volatility of the stock market. In the third chapter, we carry out the theoretical and empirical analysis on the impact of the s(?)ock index futures market on the spot market.First, from the point of view that different kinds of traders in the market will have different reaction as news emerge, we analysis combined effect of these reaction. We divide the traders into six types: non-noise traders, part-noise traders, full-noise traders, passive traders, random traders and arbitragers. As different kinds of traders will have different time-lag reaction to the news, we can use a function with time as the independent variable and with capital putted into the market as variable to describe them. So the overall effect can be described with piecewise function. From the image analysis we know the overall effect of the six kinds of reaction to the news is like a step function curve. It looks like an inverted capital letter 'U' Fining the classification for the traders we will find that the curve of the function is smoothing. Taking the random trader's action into account, the curve is really like the real stock behave curve. As the news is transferred by the six kinds of traders, we find the price of the capital turn high and low, showing serious volatility.When we possess stock index future market, non-noise trader will first put their capital into stock index future market instead of putting into stock market as before. This will raise the price of stock index future. Arbitrage activities will raise the price of spot market soon. Such changes attract other kinds of traders. These make the price vary. But in this process, the needs for the stock market are not as much as before, so the variation of the stock price will not as much as before. And when traders withdraw their capital, as long as the price of the stock index future is higher than before, the stock index future will higher than before as arbitrage.Secondly, we use the Cobweb Model to explain the effect of stock index futures reducing the volatility of the stock market. We found if various assumptions of the Cobweb Model can still be true here, the existence of the stock index future have a kind of effect reducing the variation of the stock market.Thirdly, we do empirical study on the impact of the stock index futures market on the spot market. We use Taiwan capital market as the object of the study. Time area of the data is from January 5, 1994 to December 31, 2002. First we use GARCH-M to analyze the change of the information transmission after possessing the stock index future. We found that the stock index future can reduce the speculative climate of the capital market. The effect of the new information will increase. News in the Taiwan spot market can be transferred faster. Then we use TARCH to analyze empirically on the asymmetric volatility effects. We found after possessing stock index future trade, good news shows stronger effect on the stock market but the bad news is weakened.In the fourth chapter, we single out several special ways that stock index market works upon the stock market and analyze them. Stock index futures price changes more rapidly than the stock, showing extra volatility. On the maturity date both of the stock market and stock index futures market show a kind of more serious volatility, called expiration effect. Expiration effect can be reduced in some way such as improving the trade method. The prices of the stock index futures and the stock show lead-lag relationship. Stock will copy and repeat stock index futures' price path, showing price discovery effect. The stock index futures will also increase economy efficiency by increase the transparency of the market. At first when launching stock index futures trade, it will scatter some of the stock market capital, but later as a result of the convenience that the stock index futures take into the market, more and more investors will come into the capital market showing income effect. So for the medium or long term, instead of reducing stock market investment, the launch of stock index future will attract more capital for the stock market.Stock index future is a kind of high-risk financial products, so we must control its risk strictly preventing herding behavior, market manipulation and so on. If we can control the risk effectively, stock index futures will take much beneficial impact into our stock market, and then increase market efficiency.