Comparative Study Of CSI300Cash-futures Arbitrage Opportunity Differentials And Hedging Effectiveness

With the rapid development of global financial market, the CSI300stock index futures were launched on April16,2010in China. Over a two-year period, pricing and hedging function of CSI300stock index futures were gradually improved. However, the shortcomings of cash instrument have always been the main problems for regulators and investors. They would be facing with the investment threshold if they bought300stocks according to the corresponding weights. They would be facing with the primary market trading illiquidity when they choose an open-end fund. They would be facing with the problem of discount and premium for the lack of inter-market arbitrage when they choose close-ended funds. Most investors have to adopt the statistical method of constructing a portfolio of ETFs for cash instrument. The most common way is to follow CSI300by constructing the portfolio of Shanghai180ETF and Shenzhen100ETF or the portfolio of Shanghai50ETF and Shenzhen100ETF according to the corresponding weights. However, the effect of these ways is not ideal due to the differences of the underlying index. Huatai-PineBridge CSI300and Harvest CSI300ETF, which were launched on May,2012have powerfully changed the situation that CSI300stock index futures are lacking of the corresponding cash instrument in China. Thus, in this paper, a research has been done focusing on whether indeed and how indeed these two CSI300ETFs had played a role as cash instrument, and what were the differences in both ETFs.In this paper, Chapter One is works as the summary of literature. Chapter Two and Chapter Three serves as the theoretic foundation supporting this paper. The Chapter Two introduces the present situation of stock index futures and ETF in China, then makes a comparison of ETF and other financial products, thus theoretically clarifies the advantages of ETF as a cash instrument. Chapter Three discusses the methodology of constructing the portfolio of ETFs, the cost-of-carried arbitrage strategy, cointegration-based statistical arbitrage strategy and hedging ratio model of OLS, ECM, CCC-BGARCH and DCC-BGARCH. The Chapter Four has done an empirical research. Based on the theories above, the author constructed a portfolio of ETFs through an optimized method, and compared the miscalculating upon tracking the traditional portfolio of ETFs and CSI300ETF. In the result, the author found that the tracking miscalculating of both CSI ETFs is smaller than the traditional portfolio of ETFs; Huatai-PineBridge CSI300ETF has the best fitting effect. The chapter compares the differential of the cost-of-carried arbitrage method and cointegration-based statistical arbitrage methodology, and makes an empirical analysis on both ETFs. The author found out that cointegration-based statistical arbitrage methodology has a greater scope of applicability and enjoys a bigger arbitrage opportunity. Cost-of-carried arbitrage method can not be adopted in Huatai-PineBridge CSI300ETF, but can be adpoted in Harvest CSI300ETF. Cointegration-based statistical arbitrage methodology can be adopted in both ETFs. Whatever the approach is, Huatai-PineBridge CSI300ETF has a smaller chance to fulfill arbitrage, while Harvest CSI300ETF enjoys a much bigger opportunity. Because the day trade transaction system of Huatai-PineBridge CSI300ETF encourages the liquidity of the primary and the secondary market, thus finally help to improve ETF arbitrage efficiency of the secondary market. The author calculated the optimal hedge ratio of CSI300ETFs and compared different hedging effectiveness on ETFs. The research indicates that the effect of dynamic multivariate GARCH model is significantly better than that of the model of OLS and ECM; whatever the approach is, the hedging effectiveness of Huatai-PineBridge CSI300ETF is better than that of Harvest CSI300ETF; Huatai-PineBridge CSI300ETF is more suitable for the model of DCC-BGARCH which has the high volatility of variance due to the high liquidity and relatively well-developed arbitrage mechanism. Meanwhile, Harvest CSI300ETF is more suitable for the method of CCC-BGARCH because the correlation coefficient is more close to constant.The paper has obtained some new conclusions. Firstly, the arbitrage and hedging effectiveness of both CSI ETFs as cash instruments is better than those of the other ETFs. And this conforms to the expectation of supervision authorities. Secondly, arbitrage opportunities are hard to find in Huatai-PineBridge CSI300ETF, but are more easily to find in Harvest CSI300ETF which is more of illiquid asset. On the contrary, hedging effectiveness of Huatai-PineBridge CSI300ETF is better than that of Harvest CSI300ETF. In this end, the author gives some advices for investors as follows. They’d better choose Harvest CSI300ETF for Short-term arbitrage, and choose Huatai-PineBridge CSI300ETF for hedging. Such operations can increase investors’ returns and reduce investment risks. Meanwhile arbitrage operations can objectively decrease the miscalculating upon tracking Harvest CSI300ETF. This point of view is so different from the view that is very commonly held by most investors that Huatai-PineBridge CSI300ETF is more suitable for short-term investment and Harvest CSI300ETF is more suitable for a long time holding strategy.