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 underlying stock market. Considering that market participants have less information on non-CSI 300 stocks than CSI 300 stocks, the futures market information would become valuable not only to investors on CSI 300 stocks but also to those on less recognized CSI 300 stocks. So, the futures trading would produce more trading in non-CSI 300 stocks, leading to an increase in both spot price volatility and trading efficiency of non-CSI 300 stocks.
Also, the market regulations and restrictions would contribute to the stabilization of the underlying stock market by reducing spot price volatility of the underlying stocks, especially when the markets are extremely volatile as financial crisis does. At the same time, however, these market restrictions seem to disturb the efficient transfer of futures market information into the pricing of the underlying stocks. Since there are much market frictions such as price limit and restrictions on foreign ownership in the Chinese securities markets, the relation between market frictions and spot price volatility would be more evident. Thus, governments and authorities planning to promote futures trading would need to pay careful attention to the market restrictions they bring in for the...