| CSI300Index compiled by China Securities Index Co Ltd aims to reflect the price fluctuation and performance of China A share market. CSI300Index replicate the performance of300stocks traded in Shanghai and Shenzhen Stock Exchanges which are about60%of total market value of the two exchanges. The CSI300index futures first launched by Shanghai and Shenzhen Stock Exchanges at April16,2010is derived from the CSI300index. It is the first kind of financial derivatives which is listed for trading in China. The CSI300index futures provide investors with a broader investment opportunity and means of risk aversion and increase the liquidity of the market. It also suppresses the market bubbles to a certain extent.There are three kinds of traders in CSI300index futures market. Only the hedge traders treat the futures as a tool of risk aversion which is also the initial purpose of futures transactions. The speculative traders take a position according to the anticipation of them for the market trends in future. It’s more like a gambling with huge risk, so the big incomes come with big loss. The last kind of traders is arbitrage traders. The process by which the futures price moves toward the price of the index as expiry approaches, because the futures price depends on the index price. So the arbitrage traders buy that of lower price and sell that of higher price in order to gain the risk-free profits if there is a basis between CSI300Index and CSI300Index futures price.The theoretical price relationship is just derived by assuming there is no-arbitrage in market. An Traditional tool for empirical analysis of the relation between futures and stock index is cointegration introduced by Engle and Granger. The concept of cointegration means integrated series for which a linear combination exists that is stationary. Although the series are non-stationary, they have the same trends. But there is the implicit assumption that the adjustment of the deviations towards the long-run equilibrium is made instantaneously at each period. That may be invalid in true market. As the presence of trading commissions, institutional Constraints, risk aversion and so on, the adjustment will occur only once deviations are higher than the transactions costs, and hence adjustment should not happen instantaneously and at each time. So there may be a no-arbitrage interval in real market. Arbitrage traders work only when the basis is outside the no-arbitrage interval in real market, and pull the basis back into the interval. The basis may be just a unit-root process in no-arbitrage interval.The concept of threshold cointegration introduced by Balke and Fomby allows to take into consideration this dynamic price relationships. The core of threshold cointegration is the self-exciting threshold autoregressive model(SETAR). In the SETAR model,the autoregressive coefficients take different values depending on whether the previous value is above or under a certain threshold value, thus exhibiting regime switching dynamics. This theory describe the dynamic price relationships better in real index and futures market.This paper empirically investigates the dynamic price relationships from August18,2010to October11,2010and from February21,2011to March22,2011with one minute frequency. We show that the basis indeed follow a SETAR model using the test of arranged autoregression and the test introduced by Hansen in1999, that is CSI300Index and CSI300Index futures are threshold cointegration. We also estimate the location of the threshold and the size of no-arbitrage interval. Then we estimate the theoretical size of no-arbitrage interval by calculating trading commissions in stock market and futures market, that is smaller than the size estimated. We suggest that is because the margin system in CSI300Index futures market. It’s just a risk premium required by the arbitrage trader in case receiving a margin call... |
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