Empirical Study On Chinese Future Markets’ Overreaction To Foreign Markets

This paper researches the Shanghai Future Exchange markets overreaction to theLondon Metal Exchange, and mainly focuses on non-ferrous metal futures, copper,aluminium and zincWe do theoretical analysis on the potential reasons for overreactionphenomena.The cognitive bias of investors is one of the main reasons.Tradingruleslike T+0transaction system, margin system, close position system andshortposition systemmake the overreaction more significant.In the empirical study, we find copper, aluminium and zinc in Shanghai FutureExchangeand London Metal Exchange have a lead-lag relationship. Then we do teststo analysis how the informationtransfers from the London market to Shanghaimarketand test our initial hypothesis. We find that the copper future in the Shanghaimarket used to overreact to London market, but the market is more efficient in recentyears and such overreaction no longer existed. For aluminium and zinc, there is asignificant overreaction and there is an arbitrage opportunity.