An Empirical Research On China’s Treasury Futures Price Discovery Function

Treasury futures is a senior financial derivative, which is created to satisfy the investors’demand of avoiding interest rate risk under the turbulent American Financial market in1970s.In China, the pilot transaction is not allowed until1992. However, violations such as327violation and319violation raid the market seriously and the treasury future transaction was forced to suspend in May of1995.18years later, the transaction restarted and greatly enriched Chinese Financial Future market.Until now, the treasury future market progress rapidly but still remind us of the question that if the price discovery function of treasury future worked and how effectively it works.Those doubts make investors so confused that we decide to do some empirical research about it.This research can not only guide the investors, help the regulators better understand and improve the market, but also push forward the theoretical research of this market.The first part of this paper describes the background including domestic and abroad literature review and the framework of this paper including the creative and short point.The second part introduces the Chinese treasury future including the conception, history and so on.The third part is the description of the price discovery function.Followed part is the introduction of methodologies that will applied in this paper and the analysis of the data collected through the model introduced former. The main research results are summarized as follows:Firstly, using E-G co-integration test, we have found out that there is a relationship of co-integration between futures market and spot market; Secondly, using Granger causality test to examine the price discovery function of treasury futures and spot market, the results consistently indicated that there is only a one-way leading relationship between futures market and spot market, namely the spot market guide the futures market. In other word, the spot market in China played a price discovery role very well; Thirdly, with ECM model, we have had an access to understand the short-term fluctuations between treasury futures and spot market. When the balance is broken, spot futures will improve the situation with the effect of18.72%.Then this paper makes an empirical analysis on the price discovery function of treasury future market with price volatility characteristics’ARCH, GARCH Model. The main research result is summarized as follows:the treasury future market in China didn’t play an important role in price discovery, and investors in China are irrational.In the last part, this paper carries on explanation from such aspects: Investors ’irrational, unreasonable structure of investors, etc. Finally, this paper offers some proposals.The characteristics of this paper are:(1) This artical makes an empirical analysis on the price discovery function of treasury future market in China;(2) Starting the empirical analysis from two different angles with various econometric models, this paper seems more systematic and complete.