In this paper, we discuss the effect of CSI 300 index futures trading on the Chinese stock market. Specifically, we focus on the two topics (1) price volatility and efficiency of market, and (2) the arbitrage trading
5.1 On market volatility and efficiency
I introduce the research result on the market volatility and efficiency in the Korean market. Two approaches have been used to analyze the effect of index futures trading on stock market volatility and market efficiency. One approach is to compare the change on stock price volatility and efficiency before and after futures trading is introduced. The other approach is to compare stock price volatility differences and efficient trading between KOSPI 200 stocks and non-KOSPI 200 stocks.
The empirical results show that (1) the introduction of futures trading is related with an increase in spot price volatility for both KOSPI 200 stocks and non-KOSPI 200 stocks; (2) the addition of options trading to the futures trading is related with even greater spot price volatility for both groups of stocks; (3) the publication of the KOSPI 200 company list brings in a significant increase in the spot price volatility of non-KOSPI 200 stocks, but almost no change in the spot price volatility for KOSPI 200 stocks; and (4) the futures trading would generate more trading in non-KOSPI 200 stocks, leading to a relatively large increase in both spot price volatility and trading efficiency of non-KOSPI 200 stocks, compared to KOSPI 200 stocks.
The empirical result on volatility and market efficiency indicates that the introduction of futures market trading in China is expected to increase not only the liquidity of market but also stock market volatility and hence and the efficiency of the under...
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... the expiration day. Also, to enhance execution efficiency, arbitrageurs might construct a proxy portfolio that includes only a subset of stocks, perhaps primarily large blue chip in the index portfolio. Therefore, if the expiration day effect occurs in the Chinese market, the large blue chip in CSI 300 Index would be more volatile during the last hour of trading on the expiration day.
Works Cited
Jae Ha Lee, February 2002, Index Arbitrage with the KOSPI 200 Future
Leading Futures Market KRX, Korea Exchange
Ross, S. A., 1989, Information and Volatility: The No-arbitrage Martingale Approach to Timing and Resolution Irrelevancy, Journal of Finance 44, 1-17.
Sung C. Bae, Taekho Kwon, and Jongwon Park, 2004, Futures Trading, Spot Market Volatility, and Market Efficiency: The Case of the Korean Index Futures Markets, Journal of Futures Markets 24, 1195-1228
Rob, Dixon, and Holmes Phil. Capital market; Stock exchanges; Foreign exchange market; Futures market. London: Chapman and Hall, 1992.
Efficient Market Theory suggests that in every financial market the flow of information is very efficient and this is reflected in the price of the share at which it is being traded. As we know that the price of the share floating in a market is not only dependent upon the company name printed and the information about the company in the balance sheet and other financial statements available to the public (Baghestani, H., 2009). In fact government and political stability, inflation, interest rates, treasury bills and several more factors determine the price at which any particular share is sold or bought at. Information about all these factors is always available to every investor in the market, be it the buyer or the seller.
Over the last couple of decades there has been a debate going whether or not there are behavioral aspects in finance. This means that financial markets are subject to different investors’ sentiments and that markets are not efficient, i.e. the efficient market hypothesis (EMH) does not hold. The supporters of EMH argue that all available information is included in the stock prices, which means that any long-term abnormal returns earned are a matter of chance. On the other side, the supporters of behavioral finance argues that because of over- and under-reaction by investors to information, it takes time before prices fully adjust and thus there is an opportunity to earn long-term abnormal returns.
The efficient market hypothesis has been one of the main topics of academic finance research. The efficient market hypotheses also know as the joint hypothesis problem, asserts that financial markets lack solid hard information in making decisions. Efficient market hypothesis claims it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information . According to efficient market hypothesis stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments . In reality once cannot always achieve returns in excess of average market return on a risk-adjusted basis. They have been numerous arguments against the efficient market hypothesis. Some researches point out the fact financial theories are subjective, in other words they are ideas that try to explain how markets work and behave.
In the aftermath of the US ‘Flash Crash’, regulators were quick to pin blame on HFT. Within a week the chairman of the US Securities and Exchange Commission determined there was evidence that “professional liquidity providers” pulled out of the market when shares started declining exacerbating the fall. Perhaps irrationally, policymakers without any significant evidence believe HFTs pull out of markets at signs of stress, contributing to a sudden loss of liquidity and promoting volatility (Grant, 2011).Moreover, Andrew Haldane points to the ‘flash crash’ whens he determines that the ever increasing speed of trading is amplifying volatility.
Secondly, as one of the most well developed stock market, UK market locates in the similar developing stage as US market does, adequate data ensure the reliability of the research. Finally, both USA and UK market play a critical role in modern financial system, experience from these two markets could be contributive.
Second, the efficient market hypothesis cannot explain market anomalies. These market anomalies include the pricing/earnings effect, the size and January effect, the monthly effect, holiday effect and the weekend effect. These anomalies indicate either market ineffici...
The economic rationality assumption has given an important connation for the market efficiency, as it has been the base to carry out the construction of the modern knowledge in standard finance. Resulting in the development of the most important insights in finance, such as arbitrage pricing theory of Miller and Modigliani, the Markowitz portfolio optimization, the capital asset pricing theory of Sharp, Lintner and Sharp and the option-pricing model of Black, Scholes and Merton (Pompian, 2006 and Lo, 2005). At this stage, these advances provide a sophisticated mathematical approach to explain what happen in real life. As a result, of these advances, individuals who trade stocks and bonds use these theories under the assumption that the assets they are investing in have similar value to the prices they are paying. This way, according to the market efficiency, current prices reflect all relevant information so trading stocks in an attempt to exceed the benchmark or to produce returns above average will not be possible without taking risk above the average since with arbitrage would make go back prices to their real or fundamental value (Malkiel, 2003).
The project is done to find out the impact of stock split on the stock market. In our project, we have made use of event study methodology to assess the accuracy of stock price reaction of 39 public listed Indian companies in National Stock Exchange (BSE) in the year 2006 and onwards. The abnormal returns (actual returns-returns from regression line) results were taken for 20 days before and after the announcement date to test whether the result is significant or not (Level of significance=5%). The project shows that there is no significance difference in the price level before the announcement date while after the announcement date, there was a significant difference in the price level for few days(level of significance being 5%) The project supports the hypothesis that Indian stock market is semi strong efficient.
...emakdej (2007) carried out a research of 100 splits in the Stock Exchange of Thailand and detected significantly negative impact 20 days before and 18 days after the ex-date of the stock split. This was the comparison with other studies that noted positive abnormal returns around the stock split dates. There was also an increase in both the proportion of large shareholders and the number of investors. Trading volumes were found to be lower than before. This study also found the evidence that the systematic risk was lower during the ex-dates but returned to preceding level after the stock split. Another have noted that abnormal returns were found only in the first year after the declaration of the stock. It was also noted that the significant abnormal returns only occurred during the period of 1975-1987 because of lower systematic risk in the New York Stock Exchange.
Sung C. Bae, Taekho Kwon, and Jongwon Park, 2004, Futures Trading, Spot Market Volatility, and Market Efficiency: The Case of the Korean Index Futures Markets, Journal of Futures Markets 24, 1195-1228
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
The perception that futures market can lead to decline in volatility in spot market is common. However, the converse is also true. As a result, the impact of trading derivatives on the volatility of spot market is widely debated and the role of derivatives trading has been the focus of ample recent attention. Increased regulation on derivatives has been put into practice, regardless of the lack of reliable statistical evidence that derivatives trading is associated with change in volatility. However we cannot disregard the benefits of derivatives trading as it plays an important role in price discovery, portfolio diversification and hedging. Some experts in financial markets also hold a view that derivatives markets solely create market efficiency and hence, find no ground for regulation within the financial sector and derivatives trading. There are still disagreements on what role derivatives trading play regarding the stock market volatility. Taking into consideration the above factors there is a need to study the impact of derivatives contracts on Indian market. The focus area of this thesis is to investigate the role of Index futures & Stock futures trading on the volatility of the Indian spot markets. The aim of this study is to bring perspectives to the ongoing debate about the role of derivatives in capital markets. Thus, the main research question of this thesis is:
Investing in the stock market provides for the function of creating transparency, liquidity and efficiency development and improvement of the living standards of the citizens of a particular country. Taxes that are derived from the gains and losses of investing have a great positive impact on the society. Therefore, the market’s volatility which increases the risk in stocks and the return to the government, investor, and
The data collection of the study is based on the secondary data. The data for the variables (CPI, Exchange rate) were obtained from RBI website. The data for the 5 bank’s monthly share prices (HDFC bank, AXIS Bank, ICICI Bank, IDBI Bank and YES Bank) were obtained from the NSE websites. The data for the study was taken for period of 36 months, which are the most recent 3 years data from 1st January 2009 to 31st December 2011 because to measure the impact of the variables chosen on the banks stock returns, post-recession. The data for all variables is monthly. The studies like Ibrahim (1999), Patra and Poshakwale (2006) and Liow et al. (2006) capture long-term movements in volatility by used monthly returns to avoid spurious correlation problem.