Price Discovery And Dynamics In Stock Index And Stock Index Futures Market: Evidence In CSI300Index

With the10-second high frequency data, this research investigates the short-termdynamics and intraday price discovery capacity of CSI300stock index spot marketand the newly established CSI300stock index future market. According to Engle andGranger two-step method and Wald test, we found that these two markets arecointegrated and have two-way granger causality relation. Contrary to some previousresearch, we conclude that the stock index future market takes a more dominating rolein the process of price discovery, based on both the information share measurementand permanent-transitory method. We also justify the robustness of this conclusionabout price discovery capacity through R-representation analysis. More importantly,the research uncover that the dynamics relation between two markets is much moreactive and the information transmission between them are much more timely than wasfound in previous study. Applying error correction model on the10-second highfrequency data, the highest frequency data for these markets as far as we know, wefound that the lag in which the index future market has influence on spot market ismore than2minutes while the lag in which the spot market has influence on futuremarket is40seconds, both of which are much shorter lags than were found inprevious study. We also explain the bidirectional leading relationship through threehypothesis and the features in Chinese index future market. Furthermore, we conductimpulse response analysis based on the error correction model and the results showthe price change in future market has a stronger and longer-lasting effect on spotmarket than the effect in the reverse direction.