The Impact Of Launching Index Options On The Stock Markets

A complete stock market consists of three complementary markets:the primary market to issue stocks, the secondary market to trade stocks and the derivatives market to hedge risk. Although, the derivatives market was latest developed in order to fulfill the need of risk management, it appears to be the most shining pearl in the financial markets. The stock index futures and stock index options are the two basic building blocks of the exchange derivatives market, which both have their own strengths in hedging, speculating and arbitraging. The development of financial derivatives market began relatively late. In the year of 2010, China Financial Futures Exchange launched the first financial futures, the HS300 index futures. But the index option is still not available in the Chinese exchange markets.Since 2013, with the rising demand for sophisticated risk management in China, the introduction of stock index options have gradually put on the agenda. As for the impact of the introduction of stock index options, debates have been widespread in industry and academia. On the one hand, The introduction of stock index options can certainly provide a good risk management tools for the market, but it also may lead to excessive speculation, price manipulation and such risk events and damage the stability of the spot market. Therefore, the impact of listing stock index options may be different in different markets. This study focus on the historical experience of other markets and tries to find some useful guide to the design of China’s first index option.This study describes the history of the index option and analyzes its function and role in the financial markets. Then we introduce the history of the stock and financial derivatives markets China Taiwan region whose stocks and futures markets are very similar to the ones of the domestic markets, especially in the regulation and investor structure. The experience of the introduction of TAIEX Index Option may provide great help to us. Therefore, we select the price and volume data of botch Taiwan stock and option markets and establish GARCH model and VAR model to analyze the impact on cash market. At last this study makes detailed interpretation of the empirical conclusions and makes useful suggestions for the design of the stock index option.