An Analysis Of The Correlation Between Stock Index Futures And Their Spots

Stock index future is an agreement between two parties to buy or sell a stock index at a certain time in the future at a certain price. Stock index future is a kind of financial futures which are settled by cashes, and is often used to setoff the system risk of the stock market. What's more, price discovery, reducing volatility, and increasing trading are also considered as the stock index future's function.We chose XinHua-FTA50 stock index future and HuShen300 stock index future to research the correlation between the stock index future and its underline, whose underlines are stock indexes of the A share market. In September 2006, the Singapore Exchange LTD started to trade the XinHua-FTA50 stock index future, and it met the foreign investors'need to avoid the volatility of A share market. Our stock market might be influenced by the offshore future. In order to keep stability of the A share market and develop our derivative market, China Financial Future Exchange (CFFEX) was opened in September 2006, and the simulation HuShen300 stock index future has being traded in CFFEX since then. After one and a half years'preparation, the HuShen300 stock index future is at hand.The correlation between the stock index future and its underline has two meanings. Firstly, the mean of the yield has relativity, and we used the Granger causality test and Co-integration test to demonstrate the advanced-lagged relationship between share index futures and their spots; the impulse response function was also used to measure the relationship. Secondly, the variances of the return have dynamic correlation, and we use DCC-MGARCH model to empirically analysis the correlation spillover between the two markets.Based on setting up vector auto regression model, the article adopted Granger causality test to judge whether there was real causality between the futures and spots. The results indicated that at the significance level of 0.05, the stock indexes were the Granger causality of the share index futures, and the contrary was not right. Co-integration test showed the XinHua-FTA50 stock index future and its spot had long run equilibrium, and the XinHua-FTA50 stock index future had a good function to predict the XinHua-FTA50 stock index price.From the DCC-MGARCH model, we could see the XinHua-FTA50 stock index future and HuShen300 stock index future had significant dynamic conditional correlation. The future market and its spot market impacted each other significantly, and varied with time. If the stock indexes were not the spots of the futures, they didn't have significant dynamic conditional correlation.