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
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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
The threat of online competitors is also present to every discount broker that has not switched to online trading or chooses to remain with their current business model and not offer online services. These online trading sites have unique trading capabilities that otherwise are not present at Edward Jones. They offer sound advice on stocks and other investments instantly. Each customer has to call their Edward Jones advisor in order to place a trade. This makes sense to Edward Jones because they want to help prevent the rash decisio...
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For a market to be considered efficient it means that at any given time market prices will fully reflect all available information. If this holds true, it means that it would be impossible for investors to beat the market, as securities would always trade at their fair value making fundamental and technical analysis ineffective. Investors would only be able to obtain normal rates of return in an efficient market. This idea is captured in the Efficient Market Hypothesis (EMH) that was thought up by Eugene Farma in his Ph.D. dissertation in the 1960s. As part of the EMH there are three possible levels of efficiency. These include weak, semi-strong, and strong form. In the weak form of market efficiency it is assumed that all past prices and past public information of a security are reflected in the securities current price. In the semi-strong form of market efficiency it is assumed that all public information about a security is reflected in it’s current price and the current price instantly adjusts to new information. Lastly, there is strong form efficiency where it is assumed that all information, public and private, is instantly reflected in the price of a security. It is very difficult to conclude that the U.S. market falls perfectly into one of these three categories because there are various examples of the market acting, or not acting, like each of the forms.
...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.
of USD, it would need to put more weight in long futures contracts as much as they believe in by
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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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.
If the development of Financial Market in America is like a sturdy adult, I would say the development of Financial Market in China is just like a child. The history of the U.S. financial market was established and has been growing over two centuries. For China, only twenty year has now passed since the financial market was built and growth. The Chinese financial market seems to be immature compared to the U.S. For example, China’s financial market does not have a thorough monitored stock market. The child is just starting to imitate the behavior and follow the step of the adult. However, the child is too young that mistakes always being made. On the other hand, since the child is in his early growth stage, a high level of growth is undertaking and a large progress might be attained. In today's China’s financial market, it is necessary for China to gather finance professionals in development of financial market. As a recent graduate student, working in the finance field less than a year, it is extremely hard for me in making a tiny positive effect on the growth of Chinese financial. However, to be engaged myself to the development of Chinese financial market is my long-term career goal.
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.
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).
Japan has one the most advanced economies in the world, with an advanced economy comes an advanced equity market. As other advanced equity markets are, the Japanese market is similar to the U.S. in its essential functions and its operation by the exchanges that allow its existence. The Japanese stock market is third largest in the world by market capitalization, surpassed only by the United States and China. Market participants trade over the Tokyo Stock Exchange and the Osaka Securities Exchange which combined to form the Japan Exchange Group (JPX) in 2013 (JPX.com). As of November 2015 there were 3500 companies listed as part of the JPX and over $400 billion dollars of shares traded in 2014 (World Federation of Exchanges).