The Impact of Decreased Margin Requirements on Futures Markets: Evidence from CSI 300 Index Futures

ABSTRACT

The purpose of this study is to investigate whether margin downregulations helped enhance the functions of index futures markets following the stock market crash in China in 2015. Using high-frequency trading data, we estimate the changes in the price discovery and volatility spillover relationships between the CSI 300 index and its futures. We find that reducing the margin ratio strengthens the lead role of futures in the lead–lag relationship and results in more volatility transmission from futures markets to the stock market. Furthermore, this paper shows that the expiration-day effect negatively influences the two functions.

KEYWORDS:

• Futures margin
• index futures
• price discovery
• volatility spillover

Notes

1. The high-frequency data used in this paper have minute intervals, which filter the noise in the second-frequency data. The noise includes some extreme volatilities. For example, the trading price may drop by 10% within a few seconds and rebound immediately. Such volatility in a short time usually reflects a lack of market liquidity, and the instant rebound indicates that the extreme price is not accepted by most traders. Thus, we eliminate the abnormal changes by filtering the noise and using minute-frequency data.

2. The complete results of the VEC models with 1-min and 5-min data are shown in Appendix A and Appendix B, respectively.

3. The reasons for 1-minute high-frequency data being noisier than 5-minute data can be divided into two aspects. On the one hand, due to the lack of market liquidity, a large trading volume of one-time and one-way buy or sell may emerge, causing extreme price spikes or drops to occur instantaneously. On the other hand, the amount of emotional trading increases in the market in response to great panic or excitement, leading to more abnormal price volatility. With the time interval stretched from 1 minute to 5 minutes, extreme volatility is smoothed to some extent.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71971192]; Natural Science Foundation of Zhejiang Province [LY19G010005]; MOE (Ministry of Education in China) Humanities and Social Science Research Youth Fund Project [19C11482075].