The Shock Effect Of Recovering China Bond Futures To Spot Market

Since September 6,2013, China’s five-year bond futures has been officially traded for more than a year, compared with mature foreign markets, our interest rate market still needs to be improved. Will the bond futures be smoothly introduced under such circumstances? In the reviewing of our first bond futures, the interest rate formation mechanism was not driven by market, without market-oriented interest rate fluctuations which brought no hedging impetus, but by speculative impulse for interest rate policy more, thus fail to present the actual condition of supply and demand of spot market in China. In consequence, the following questions need to be explored and researched, as whether the returning of bond futures played the price discovery function or had an impact on the cash market volatility and to what extend did it effect?Based on the above questions, this paper will analyze the impact of the bond futures’ return on spot market in two ways. First is to study the futures’ conduction effect on spot price. Bond futures as a kind of interest rate futures, boasts for low transaction costs, concentrated market, short selling mechanism and easy to hedging, which make future price more sensitive to interest rate changes, so futures will respond to market information first, then pass to the spot market and have an impact on it. Second is to study the futures’ volatility effect on the spot market—that is the change happened in spot market after the introduction of futures.By the study of price discovery mechanism, we tested the price sequence ADF unit root, established VAR model to analyze the dynamic relationship between futures and spot prices and based on VAR framework to do Granger Causality Test to explain the transitive relation between the two prices, coupled with impulse response and variance decomposition to analyze the long-term stable relationship measured by the changes of two market prices; by explaining volatility effect, we set up a virtual variable according to the introduction of bond futures, established a set of the GARCH model to examine the volatility effect on the spot market. The result shows that:(1) the futures price barely has volatility effect on the spot price, and temporarily the futures price can’t play the role of price discovering.(2) the virtual variable shows negative which indicates the introduction of bond futures does reduce the volatility of the spot market and market risks can be reduced effectively.Finally, this paper came up with two reasons for the indistinctive impact of bond futures on spot price:for one is the lack of non-institutional investors on the market which result in inactive transaction; the other is the lack of interest rate liberalization which leads to inefficiency in price discovery. Thus propose three policy suggestions includes further deepening the market-oriented interest rate process, develop spot market and improve supervise system.