Price Discovery In The CSI300Index And Its Derivative Markets

In April2005, the CSI300. which laid the foundation for cross-market investments and the innovation of related derivatives, was published by the Shanghai and Shenzhen Stock Exchange. Five years later. CSI300Index futures were allowed to be traded on the China Financial Futures Exchange. Seven years later, with the completion of the CSI300ETF products’fund-raising, the CSI300Index became the first Index that has two derivatives market in China’s financial markets.Markets have different efficiency due to various leverages, costs and restrictions. In order to make a comparison among the efficiency of three different markets with the same CSI300Index, we decided to use Vector Error Correction Model (VECM) and Modified Information Share Model (MIS) proposed by Lien and Shrestha(2009) to fulfill our research.The empirical results proved that there exists a long-term stable relationship among the three markets. In the long-term, when the equilibrium is broken, the futures market plays a major role to guide the adjustments of the other two markets back to the new long-term equilibrium. On the other hand, in the short-term, the futures market also leads the other two markets, but with a stronger and longer effect to ETF market than spot market. Spot market also leads ETF.Next, we used the modified Information Share Model (MIS) to quantitatively analyze the contribution of the various markets in the formation of long-term price. The results showed that futures market plays the most important role, and the contribution is about80%; Spot market makes a smaller contribution of about20%; ETF market almost does not work during the process. Finally, the paper explained reasons for the empirical results with the help of price discovery hypothesis, and we also pointed out the value of this study for investment decisions.