A Study On The Impact Of Loosening Of Futures Trading Rules On Price Discovery Of Chinese Stock Index Futures

As a result of the stock market crash in mid-2015,the China Financial Futures Exchange(CFFEX)imposed strict regulations on stock index futures trading in September 2015,after which liquidity in the stock index futures market was almost lost.The literature generally argues that the strict restrictions on trading have led to an impairment of the price discovery ability of the futures market as well as the efficiency of information transmission.Therefore,in order to meet market demand and restore the function of the futures market,the CFFEX gradually eased trading restrictions on stock index futures in four tranches from 2017 to 2019,and the liquidity and trading volume of the futures market began to steadily improve.Against this backdrop,the impact of the relaxation of trading restrictions on the price discovery capability of futures has become an issue of widespread concern among academics,regulators,and investors.The loosening of futures trading restrictions can be considered as a natural experiment that provides an opportunity for this paper to explore the factors affecting the price discovery ability of CSI 300 index futures.An examination of the price discovery ability of the stock index futures market during this period can provide empirical evidence of changes in the price discovery ability of the futures market in general and explain the dynamics of price discovery in the Chinese financial market in particular.We examine the price lead-lag relationship,price discovery contribution,intraday returns,and volatility spillover in the futures market to reflect the long-term and shortterm price discovery functions of the futures market,using high-frequency data for the CSI 300 stock index futures and spot,respectively.Further,we compare the differences in price discovery ability of futures markets before and after each loosening trading rule using static and dynamic methods.The results show that the spot market dominated the price discovery process during the period when stock index futures trading was severely restricted,and the price discovery ability of the futures market was restored with the loosening of trading restrictions.However,the increase in position limits weakened the price discovery ability of stock index futures.The volatility spillover results show that the change in trading mechanism also led to a reversal of the volatility spillover relationship between futures markets compared to the period of tighter trading rules,with futures markets transmitting greater returns and volatility to equity markets.Overall,we observe evidence that the price discovery ability and information transmission efficiency of futures markets have improved with the relaxation of trading rules.