The Analysis Of Index-futures Arbitrage In China

This thesis proposes an index-futures arbitrage model, computes the frontier for arbitrage opportunities and estimates the parameters based on the China's stock market. We demonstrate the futures margin rates and the transaction costs rates in stock market and futures market respectively. We then analyze the sensitivity of free cash reserve rate under several scenarios, which are used to capture the arbitrage opportunity, as well as to control the risk of margin call. For institutions with different cash management abilities, we suggest that the institutions with high level of cash flows to use the Shanghai Interbank Offered Rate as the risk-free rate, while others use demand deposit interest rate as the risk-free rate. According to the cash dividends of the underlying index of the past two years, investors should pay particular attention to the cash dividends for contracts maturing in June and July.In this thesis, we compare several index replication methods. The HS300 index funds have high transaction costs and a slow convergence rate. The Exchange Traded Funds have relative low transaction costs and stable tracking performance, but the liquidity causes an issue. When the portfolio is constructed by the index stocks, the replication outperforms these funds and is quite liquid. We prefer the full replication since the partial replication might require a higher reserve rate to cover the negative cumulative excess return due to the immaturity of China's stock market.Finally, we consider some application problems the investors would encounter when open, take or close position, and propose possible reactions.