Price Discovery in the Chinese Stock Index Futures Market

ABSTRACT

We investigate China’s three stock index futures, and their underlying index in Chinese financial markets, to test their long- and short-run price discovery ability. Additionally, we analyze the regulation change of September 7, 2015, which greatly affected the futures market by imposing restrictions on trading volumes. The results suggest that the futures market tends to dominate price discovery compared with the corresponding stock indices, and that this effect became stronger in the post-regulation period. However, CSI 500 index futures initiate price discovery in the futures market, whereas the SSE50 lead spot market indices before the September 2015 regulation. A crash in CSI 500 futures would easily result in a market-wide crisis, as we conclude from analysis of monthly price discovery dynamics. This suggests one possible explanation for the market crash of 2015. Our results provide the first description of whole futures market price discovery characteristics in the Chinese stock market.

KEY WORDS:

• crisis
• price discovery
• regulation change
• stock index futures

Supplementary material

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Additional information

Funding

This work is supported by National Natural Science Foundation of China (NSFC), Yong scholar project (71701106); NSFC-ESRC jointly supported international cooperation project (7161101113); NSFC key project (71532009); China Postdoc Scientific Fund (2016M600182).