Price Discovery And Volatility Spillover Effect Of Mini-Gold Contract

Mini future contract, also called small future contract, only has part of the value of standard future contract, while it has many excellent characteristics, such as convenience in transaction, good liquidity, ability to lower the barriers to enter the market, more attractive to scattered money, and so on. From the point of mature international market experience, in order to meet the needs of small and medium-sized investors, mini future contracts will be launched when the financial market developed into a certain stage.On January 2th, Shanghai Gold Exchange introduced "mini gold contract extension" which has been prepared for a long time. The introduction of the new product is aimed at coping with the increasingly fierce market competition, adjusting the investment structure, improving financial market instruments system, attracting small and medium-sized investors, as well as increasing the technology and improving the competitiveness of the exchange. Because of the 10% margin trading system and the small hand of the mini contract which is only 100 g, just one-tenth of the standard contract, the mini contract makes the market access threshold greatly reduced, compared with the spot gold main contract Au99.99.As an innovation tool to improve the efficiency of the market, the mini contract is invented for small and medium-sized investors. But there is no relevant research on whether mini contract can effectively improve the efficiency of the gold market, nor on whether the market can enhance the flow of information. The market price discovery function can reveal the efficiency of the market effectively and can reflect the maturity, influence, and the strength of price stability of the market operation directly. Therefore, this article studies whether mini contracts can improve information transmission efficiency of the gold market from the perspective of price discovery.This article selects five-minute high-frequency data as the research object using VEC model, Granger causality test, I- S model, P- T model, BEKK –MGARCH model as well as DCC-MGARCH model to analyze price discovery process and volatility spillover function of the mini market. The empirical results show that, 1) there is a bi-directional leading relationship between mini market and the spot market; 2) although the volume of mini market is only one five of spot gold main contract market, the price of mini market dominates the price discovery process with a contribution over 70%; 3) the average dynamic correlation coefficient of those two markets is up to 0.89 which indicates the existence of the large degree of price convergence and the high degree of market integration. What's more, the volatility spillover effect from the mini market to the spot market is much greater representing information is mainly transmitted from the mini-gold contract market to spot market.