The Effect of CSI 300 Index Futures Trading on the Chinese Stock Market

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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...

... middle of paper ...

... 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

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