Impacts Of The Introduction Of Options On The Effectiveness Of Futures Pricing

In the early 1980s, a wave of financial liberalization emerged and stock index futures and stock index options were produced. They have occupied the highest market share of financial products in just 30 years. Varieties of financial products have helped investors to avoid risk, get excess returns and optimize asset allocation. Especially the non-linear profit characteristics of stock index options, allow investors to freely choose the risk they’d like to take, the tendency risk or volatility risk. Theoretically, the prices of the related financial products restrict each other. The existing arbitrage opportunities can be quickly identified and "destroy", with the aid of computer technology. Therefore, the richer the financial product is, and the more effective the market price is. In the 1997 Asian financial crisis and the 2008 financial crisis, positions of the stock index futures and options rise rapidly, helping to mitigate volatility of the market and then to protect investors from more loss.Domestic financial market has satisfied the conditions to trade index options, that the investors hold sufficient capacity and the laws and regulations are more comprehensive. CSI 300 futures trading simulation started in 2006, and then in the 2010, the futures are trading in the open market. Investors can use index futures to offset the risk of that stock can not be shorted. In November 2013, CSI 300 options trading simulation opened for all members of China Financial Futures Exchange. Because of this, domestic financial products are more various. This paper aims to verify whether the product diversity can promote rational pricing in financial markets, that is, whether the introduction of stock index options can increase the rational pricing of stock index futures.The actual price of the stock index futures consists of two parts, the theoretical price and noise price. The theoretical price can be estimated by the cost of carry model. And noise price includes fixed deviation in a certain time period determined by investors’capacity and irrational bias determined by investor sentiment. Investor sentiment is the psychological dimension of investors, which can not be observed directly. Investor sentiment can be speculated by integrating the consumer confidence index, volume, numbers of newly opened stock accounts, PE ratio and so on. By comparing the degrees of the irrational factors’impact on the stock index futures’price before and after introduction of stock index futures, we find that after the introduction of the option not only fixed deviation becomes smaller, but the impact of investor sentiment on the futures price is also smaller. In a word, the introduction of stock index options promotes more efficient pricing of stock index futures. But there are some deficiencies in the estimation, which have yet to be improved. Firstly, the assumptions of the cost of carry model are harsh. Secondly, some of the data is not precise enough. Finally, the stock index futures’ trading is still in the simulation stage.Financial product diversity makes more effective pricing of the related products and protects investors from some risk. The trend of financial product diversification in the domestic market is irreversible.