China's Stock Index Futures Market Price Discovery Research

This thesis investigates the dynamic price relationship between Chinese stock index and stock index futures using the high frequency data. The thesis adopts a recursive cointegration trace test to show that there exists a long term relationship between CSI 300 index and its futures prices. Meanwhile, through the likelihood ratio test on the cointegrating vector and the error correction speeds, the results of the study identifies the long run relationship between the futures prices and its underlying index prices, and the cointegrating vector is estimated. Cash market leads the futures market in the price discovery process. In addition to the cointegration test, the thesis uses a Haar wavelet method to transform the original data into eight different time series at different frequencies. The findings based on the coefficients of the regressions confirm that the relationship between the futures and its underlying index still holds in long run. If any arbitrage opportunity exists, it has to be exploited on short-term transactions.