An Empirical Study On Impact Of Index Futures Trading On Spot Market In China

Since the international capital flows were increasingly globalized in1990s, the finance has become the core of countries’ economic development. Stock index futures have become an indispensable part of financial instruments during economic development of countries. At present, massive hot money flows into financial markets, which results in an increasing unpredictable financial market and stock market fluctuation, volatility of financial assets risks has surged along with mounting financial market investment risks. Stock index futures utilized as a tool for avoiding stock market risks, but no final conclusion has yet been reached on its influence over stock market. Hence this research set Shanghai and Shenzhen300stock index futures (CSI300) as research objective, researched influence of CSI300on the volatility of stock market from an empirical perspective. The paper intends to ascertain the impact of futures on stock market risks and propose recommendations to improve stabilization of Chinese security markets.In investigating influence of emerging CSI300on CSI300daily return rate, this article selected CSI300daily return rate sample data from April16of2007to April15of2013. The research makes an overview of stock index future and then reviews the development process of CSI300, the last section makes an empirical analysis. In the empirical analysis, the author compares GARCH models in different lag orders, finally determined the most appropriate model GARCH (2,1) and research volatility of CSI300daily return rate by applying it. Then introduce dummy variable which is whether or not to launch CSI300contract into the conditional variance equation. This paper add dummy variable (0,1) into GARCH and EGATCH model, where value0indicates that the stock index futures do not exist while value1stands for stock index futures is exist. In order to research whether volatility influence of favorable news and unfavorable news is symmetrical on CSI300daily return rate, the paper researched sample data before and after the introduction of CSI300contract based on EGATCH (2,1) model. The research findings are organized as follows:(1) Statistical description analysis reveals the distribution of CSI300daily return rate and futures contracts daily return rate was right skewed, indicating high peaks and fat tails (leptokurtic) in comparing with normal distribution. In addition, CSI300daily return rate has greater left tail while CSI300futures contracts daily return rate demonstrated more obvious leptokurtic features. (2) ADF unit root test indicated stationarity of CSI300daily return rate. According to the ARCH-LM test, in the case of a significant level of1%, the residuals of CSI300daily return rate show volatility clustering. That is to say, ARCH effect is existing and GARCH model can be utilized.(3) Based on the Akaike information criterion (AIC) and the Schwarz information criterion (SC), CSI300daily return rate should choose GARCH (2,1) model. The author then added CSI300data into conditional variance equation of GARCH (2,1) model. Dummy variable0and1represents stock index futures do not exist and stock index futures is exist respectively. Empirical results shows coefficients of dummy variable are significant under the significance level of5%, which means introduction of CSI300stock index futures has significant influence on CSI300daily return rate(4) EGARCH (2,1) model results indicated significant leverage effect between CSI300daily return rate sample data and sample data of CSI300before introduction of IF1009contract. The negative values of result demonstrated asymmetric volatility influence between favorable news and unfavorable news on CSI300daily return rate. Besides, volatility influence of CSI300daily return rate is more susceptible to unfavorable news in comparing with favorable news. Nevertheless, there are not obvious leverage effects after launch of CSI300futures contracts as well as volatility influence of favorable news and unfavorable news on CSI300daily return rate, consequently explained introduction of CSI300contract obviously weaken the leverage effect and improve China stock market efficiency in the meanwhile.