Spillover Effect In The CSI500 Index Futures And Spot Market

The stock index futures have been controversial since they were used as risk management tools. However, the stock market crashed in June 2015, which pushed stock index futures onto the cusp of public opinion. The opinions varied. Should we blame the stock market crash on the stock index futures? The answer to the question relates to the systematic financial risk management, which is also very significant to financial market.The author chose CSI500 index futures and CSI500 spot market data, which can represent small or medium size stocks well, as sample to analysis in this paper. The author constructed five econometric models to explain the spillover effect in the futures market and spot market, based on the literature review. The author partitioned the spillover effect into mean and volatility spillover effect and did researches on each part. Also, the author studied on the asymmetric feature of spillover effect in CSI500 index futures market and spot market. In this paper, the author found that CSI500 index futures have a one-way mean spillover effect on the spot market. The CSI500 index futures would lead the changes in spot market about 10 minutes ahead based on the results of Granger Causality Test, which also indicated that the futures market played a significant role in the price discovery of stock market. Secondly, the author found the spillover effect in CSI500 index futures and spot market is significantly asymmetric. In the other words, the stock market or futures market would rise modestly and fall sharply.The author claimed that stock index futures should not be responsible for the market crash in mid-2015. On the contrast, the stock index futures played important roles in price discovery. The stock index would be less precise in price discovery when lots of stocks were at trading halt. The rational arbitrageurs would short the spot market and long the stock index futures since the stock index futures had great discount due to their precise price discovery in security values. But some stocks cannot be sold when they were at trading halt, the traders would over-sell the stocks on trading to reduce the discount in futures market. The stock index futures would slump with the estimated value of spot market declined. Thus the stock market dropped into a "down cycle". But the introduction of stock index futures enhanced the asymmetric effect in spot market indeed, in the other words, spot market falling more sharply.Finally, this paper gave some advice for supervisors to keep financial market stable.