The Impact Of Stock Index Futures Trading Restrictions On A-share Market Liquidity

This paper focuses on the impact of a series of trading restrictions on stock index futures adopted by China Financial Futures Exchange in 2015.Since there is no liquidity measure that can measure liquidity under a pricelimit system appropriately,this paper refers to the definition given by Grossman and Miller(1988): market liquidity is modeled as being determined by the demand and supply of immediacy.Also,taking into account that even under the same market condition,the buyer and the seller's situation may be completely different,we put forward a pair of liquidity measures based on high-frequency data which are still applicable under the price-limit system,our liquidity measures are divided into the buyer liquidity and seller liquidity.Then,we use this pair of liquidity measures based on real high-frequency data from A-share market to examine the impact of stock index futures trading restrictions on the stock index futures market liquidity and spot market liquidity.Applying time series analysis,we found that after the implementation of index futures trading restrictions,the stock index futures market liquidity decreased significantly.Because of the rigid restriction on daily limit of 10 hands,intraday high-frequency transactions in stock index futures market cannot be carried out any more.The investors holding cost and extension cost also increased significantly because of much higher transaction costs and margin ratio than before.The rigid restrictions placed on stock index futures market haven driven almost all high-frequency traders and some alpha traders out of the futures market,so the stock index futures market liquidity reduction can be expected.Applying Difference-in-Difference analysis,we found that the liquidity of the A-share spot market also declined significantly after the trading restrictions was announced and then implemented.Compared with the nonconstituent stocks,the liquidity of the index constituent stocks decreased significantly after the implementation of the restrictive measures.Compared with the CSI 500 constituent stocks,the liquidity of the CSI 300 constituent stocks decreased more after the stock index futures trading restrictions.