The Effect Of The Margin Financing Loan Business On The Pricing Of The CSI300Index Futures

The CSI300index futures has developed rapidly since its launch on December31th. Till the end of2013, it has successfully delivered44contracts with total turnover amounted to301.38trillion yuan, ranking fifth in the global index futures market. The introduction of index futures is part of a broader transformation of China’s stock markets. The CSI300index futures is important for traders to hedge their positions against downturns in China’s notoriously volatile markets with a stabilizing effect on the stock market. Most of the studies indicate that because of the shortsale constraints, the CSI300index futures are significantly overpriced. On30th August2012, the Margin Financing Loan Business of the China Securities Finance Corporation Limited (for Trial Implementation) and Other Relevant Business Rules was issued, aiming at helping securities companies expand the scope of their margin trading and securities lending businesses. With respect to the margin funds loan business, the margin securities business has been much smaller in scale by the end of2013. As the scope of designated securities eligible for lending and designated lenders is limited, the effect of margin financing loan business on China’s capital market, especially the CSI index futures market is not known.This paper uses the Cost-of-Carry model to calculate the theoretical price of the CSI index futures. By the regression model, this paper studied factors affecting the mispricing rate, especially the effects of the margin financing loan business on the pricing efficiency of the CSI index futures. Under the assumption of perfect market, we observe frequent overpricing before the issue of the margin financing loan business. Hereafter, underpricing is more frequent and there is a significant decrease in the magnitude of overpricing. The CSI index futures is mostly reasonably priced, accounting for transactions cost. The regression results show that shortselling will reduce the magnitude of overpricing, while the margin financing loan business does not show any significant effect on the pricing of the CSI index futures.