An Empirical Study Of The Price Discovery Efficiency And Hedging Effect On Chinese5-year T-bond Futures Contract

China reissued its first interest-rate futures contract that the5-year T-bond futures contract on September6,2013after a lapse of18years. Theoretically, the price discovery function of T-bond futures is in favor of the formation of Treasury yield curve which reflects the real relationship between market supply and demand, and the hedging function is to provide investors with a means of interest-rate risk management. The two functions just to solve the two fundamental problems that determine the pricing benchmark of interest rate and interest rate risk management which interest rate liberalization need to be solved. Therefore, in the context of interest rate liberalization, the introduction of T-bond futures, in particular, the play of two functions for T-bond futures is significant. However, the play of functions for T-bond futures subjects to many factors in practice, whether it was to play and how to play the effect need to empirical test. There is no research based on real data at home currently; and few studies based on simulation data, and the researchers did not take into account the specificity of T-bond futures trading system in the study of price discovery, and the research method is limited to the OLS regression in the study of hedging, there is not exploring the hedging effect of5-year T-bond futures to different maturities interest rate risk. In this study, we conduct a comprehensive and systematic study on the efficiency of price discovery and hedging effectiveness of the five-year bond futures using the real data, and to evaluate the efficiency of T-bond futures market and propose appropriate policy recommendations.In the study of price discovery, this paper reviews the research methods of the price discovery efficiency on the futures market, and makes the empirical analysis on Chinese5-year T-bond futures market on the existence and contribution degree of price discovery. The results show that Chinese T-bond futures market already has the ability of price discovery and the contribution degree of price discovery is98.232%, far more than the spot market. It implies that Chinese T-bond futures market currently is efficiency, is playing a dominant position during the information transmission, contract design has achieved the basic functions of price discovery.In the study of hedging, this paper reviews the development and evolution history of hedging model, and tests the hedging effect of Chinese5-year T-bond futures to six different maturity T-bond index in within sample and out of sample using seven hedging models. The results show that whether in within sample or out of sample, the hedging effects of seven models are relatively close, But the hedging effect of OLS model is relatively better in within sample. And the hedging effect is on5-year T-bond index as the center with the length of the average maturity of T-bond index to the5-year maturity increased, and both ends gradually worse. However, the VAR model and VAR-CC-GARCH model become relatively better model instead of the OLS model out of sample, and hedging effect increases with the extension of the average maturity of T-bond index, the hedging effect of1-3years period has only18%, while other maturities have achieved above85%. The results show that the hedging effect of Chinese5-year T-bond futures is very effective to long-term interest rate risk, but worse to short-term interest rate risk. This tells us that the regulatory authorities should launch short-term interest rate futures as soon as possible to meet the demand for short-term interest rate risk management.In summary, this study shows that the price discovery function and hedging function of Chinese5-year T-bond futures contract have been a good play, which indicates that Chinese5-year T-bond futures contract in terms of the contract design, market system design, as well as market regulation and other aspects are effective. This provides an important reference to the introduction for short-term and long-term T-bond futures. What’s more, the two functions are benefit for the formation of Treasury yield curve. At the same time, it provides the tool for interest rate risk management to the market. However, the5-year T-bond futures contract does not cover the full yield curve, it can’t satisfy investor’s demand for interest rate risk management of various maturities. Therefore, to launch other maturity interest rate futures, improving the short end and long end of yield curve, providing the interest rate risk management tools with different maturity for the market, is an important issue faced by the regulatory authorities.