An Empirical Analysis Of The Effects On Market Efficiency From Exchange Regulations

The research in this paper focuses on the changes in market efficiency of index futures after the regularization by exchange.The data covers 13 months and 263 trading days from Feb 2nd 2015 to March 4th 2016. We also split the data into two sub time frames. The first was from Feb 2nd 2015 to July 31st 2015, covering 122 trading days and representing the half year previous to the regularization. The second was from September 14th 2015 to March 4th 2016, covering 114 trading days, representing the half year after.We first output some exploratory analyses on CSI300 market liquidity, using the data of volumes and bid-ask spread. It began with the exploratory analysis on the 5-minute volume data. Based on the analysis, we identified a huge drop of volume right after the exchange had adjusted the transaction fees, which supported that the regularization had a negative impact on market liquidity.We also assessed the series of 5-minute rate of returns and daily rate of returns by using runs test, unit root test, variance ratio test and etc. The result has shown that the 5 minute series followed random walk in the entire period, as well as in the two separate time frames. The same result was returned for daily series using unit root test and variance ratio test. However, the result from runs test on daily series uncovered an inconsistency. The series had not followed random walk after the adjustment, which objected the presence of weak market efficiency. As a result, the increase of the transaction fees affected the market efficiency.Second, we also applied Granger test to index futures and the CSI300 index and found that no effect of the index futures'volatility on CSI300 index volatility, and vice versa. Besides, by cointegration test, stable linear association between index futures and the CSI300 index has been found in both time frames and the entire period. we also applied ECM model to series of 5-minute rate of returns on index futures and the CSI300 index, the price deviation was unable to be fixed in time when it happened. And such incapability was exaggerated after the increase in transaction fees.In conclusion, the analyses have shown that as an adjustment by exchange, the transaction fees' increase had a woeful impact on the market.