Volatility And Liquidity Effects Of The Introduction Of The Stock Index Futures On The Underlying Markets

Stock index futures have become the most rapidly growing derivatives in the market ever since the debut some 20 years ago. Booming Chinese capital market requires stock index futures, while FTSE Xinhua A50 index futures developed by Singapore Exchange in 2006 make it more necessary to introduce futures market in China. After three years of preparation, HS300 stock index futures were launched on April 16,2010.Due to the interaction between futures markets and its underlying markets, introduction of stock index futures acts on the microstructure of underlying market, especially on its volatility and liquidity. Hence great attention is given to such an influence because volatility and liquidity associate with investment risk and return for investors and with policy making for regulators. This paper discusses the mechanism between the futures and the underlying market on the basis of previous studies, and further proposes the theory that index component stocks and none-component stocks are impacted by this mechanism asymmetrically. Apart from theoretical studies, this paper also analyzes empirically effects in terms of volatility and liquidity. Research on fluctuation involved with t-test and GARCH family model shows that the introduction of index futures at least abates no volatility of the spot market. In respect of liquidity, on which studies are limited in China, a multiple regression model is created to confirm that introduction of futures reduces the liquidity.In the end, a suggestion is proposed according to the empirical results, and future study interests are included as well.