The Impacts Of The Introduction Of CSI-300Stock Index Futures On Chinese Stock Market Volatility: An Empirical Research

Feb.24th,1982, the first stock index future contract with the underlying asset of Value Line Index in the world was introduced by Kansas City Board of Trade, which marked the birth of index futures, a new type of hedging tool for risk. Since the1990s, the development of economic globalization and trade liberalization, the increasingly frequent flows of international capital and the unrest of political situation in some areas and countries increased the uncertainty of global capital markets. So, the demand of hedging tool for risk for investors growing tremendously, which makes the number and the volume of stock index futures rising sharply.According to Portfolio Investment Theory and Capital and Asset Model, the risk plays an important role in the pricing of asset. In a market of asset fully diversified, the investor would require a corresponding reward to make up for their risk. There is an equivalent relationship between return and risk, so investors would weigh up risk against return when they make investment decisions. So, as an index measuring risk of stock market, the stock price volatility is always a hot issue in the study of financial field.As a financial derivative instrument, on the one hand, stock index futures has the function of price discovery, mitigating risks and allocating resources, which can reduce the volatility of spot market; on the other hand, stock index futures is also a tool for speculator to manipulate the stock market, which would aggravate the volatility. That is to say, stock index future has both positive effects and negative effects on the spot market price volatility. Substantial amount of studies are undertook by scholars home and abroad around the introduction of trading of stock index futures contracts on stock market volatility. The findings of these studies range from the one side suggesting that futures market trading activity has no significant effect on changes in spot market price volatility, or that it leads to a decrease in underlying index or stock volatility, to other side indicating that it has a significant positive effect on underlying index and spot market volatility. Apr.16th,2010, CSI-300Stock Index Futures was introduced by China Financial Futures Exchange. What’s the effect on Chinese stock market volatility of CSI-300Stock Index Futures in the past two years is an issue worth research. We can get an empirical understanding of the effect on Chinese stock market volatility of CSI-300Stock Index Futures through in-depth discussion.Specifically, there are three objectives in this thesis:(1) whether the introduction of CSI-300Stock Index Futures has effect on Chinese stock market volatility;(2) whether the stock market information transmission efficiency has changed since the introduction of CSI-300Stock Index Futures;(3) whether stock index futures trading has impact on Chinese stock market asymmetric effect. In the empirical analysis part, in order to examine the issue more precisely, the author isolating the influence caused by other factors by adding corresponding proxy variables into models. For objective (1) and (2), the author established the GARCH (1,1) model, and the statistical results indicate that the CSI-300Stock Index Futures reduce the volatility of Chinese stock market, what’s more, the trading of CSI-300Stock Index Futures improve the quality and speed of the information transmission. For objective (3), the author established the EG ARCH (1,1) model, and the results show that the asymmetric effect disappears after the introduction of CSI-300Stock Index Futures.The possible innovation of this paper is eliminating influence caused by other factors as much as possible in empirical analysis part, including domestic and international economic situation, investor sentiment and Day-of-the-Week Effect. Hence, we can depict the influence of CSI-300Stock Index Futures on stock market price volatility.Because of the author’s limited academic ability and other objective causes, there are some defects in this paper. First, the sample period is relatively short, and the sample size is small, so the results of this paper only apply to explain the influence in short term. Second, due to much influence on volatility caused by other factors, more accurate models need to build to reveal the influence of CSI-300Stock Index Futures on stock market price volatility.