The Impact Of Index Futures Trading On The Underlying Constituent Stocks

The introduction of futures trading on the spot market has a huge impact on stockmarket because it provides effective hedging tools for institutional investors and retailinvestors. The index futures has changed profit model of the stock market andincreases the depth of the domestic capital market.The stock index futures are helpful on avoiding systemic risk, and stabilizing thecapital market because of the function of hedging and arbitrage, price discovery,dispersing investment risk and so on. The impact of the stock index futures on stockmarket has been researched at home and abroad lot. However, there is no detailedstudy that the impact of the introduction of stock index futures on the constituents hasbeen researched.In this essay, theoretical and empirical analysis will be used. The research showsthat valuation premium does appear in the underlying index constituents, moreapparent before the introduction of HS300stock index futures, and with the passageof time this phenomenon becomes increasingly weak. Stock index futures tradingincreases the volatility of the underlying constituent in short-term, but becomes weakin the long term.