Stock index futures trading impact on spot price volatility. The CSI 300 studied with a TGARCH model

Abstract A TGARCH modeling is argued to be the optimal basis for investigating the impact of index futures trading on spot price variability. We discuss the CSI-300 index (China-Shanghai-Shenzhen-300-Stock Index) as a test case. The results prove that the introduction of CSI-300 index futures (CSI-300-IF) trading significantly reduces the volatility in the corresponding spot market. It is also found that there is a stationary equilibrium relationship between the CSI-300 spot and CSI-300-IF markets. A bidirectional Granger causality is also detected. “Finally”, it is deduced that spot prices are predicted with greater accuracy over a 3 or 4 lag day time span.

[1]  Scott C. Linn,et al.  An Examination of Stock Market Return Volatility During Overnight and Intraday Periods , 1990 .

[2]  Chunchou Wu.  Samuelson Effect and Hedging Effectiveness in the CSI 300 Index Futures , 2018 .

[3]  N. Antonakakis,et al.  Dynamic spillover effects in futures markets: UK and US evidence , 2014 .

[4]  Zihui Yang,et al.  Intraday Price Discovery and Volatility Transmission in Stock Index and Stock Index Futures Markets: Evidence from China , 2010 .

[5]  Raisul Islam.  Comparing Financial Contagion and Volatility Spill over and StructuralBreak Within Major Asian Economies Pre and Post Global Recession to that of Asian Crisis , 2014 .

[6]  Does futures trading increase stock market volatility? The case of the Nikkei stock index futures markets , 1999 .

[7]  C. Calderon,et al.  The Direction of Causality Between Financial Development and Economic Growth , 2003 .

[8]  Ruey S. Tsay,et al.  Analysis of Financial Time Series , 2005 .

[9]  Impact of Single Stock Futures Trading on Stock Price Volatility of Underlying Stocks: Empirical Evidence from Pakistan’s Stock Market , 2011 .

[10]  Abdul Kamal Char,et al.  Intraday Lead-Lag Relationship between Index Futures and Stock Index Markets: Evidence from Malaysia , 2018 .

[11]  Does the introduction of index futures stabilize stock markets? Further evidence from emerging markets , 2018, International Review of Economics & Finance.

[12]  F. Asche,et al.  The spot-forward relationship in the Atlantic salmon market , 2016 .

[13]  Christos Floros.  Price discovery in the South African stock index futures market , 2009 .

[14]  Shiqing Xie,et al.  The Impact of Index Futures on Spot Market Volatility in China , 2014 .

[15]  Does the introduction of stock index futures effectively reduce stock market volatility? Is the 'futures effect' immediate? Evidence from the Italian stock exchange using GARCH , 2002 .

[16]  B. Zheng,et al.  DYNAMIC RELAXATION OF FINANCIAL INDICES , 2009 .

[17]  Hyun-Jung Ryoo,et al.  The impact of stock index futures on the Korean stock market , 2004 .

[18]  J. Geweke,et al.  Measures of Conditional Linear Dependence and Feedback between Time Series , 1984 .

[19]  Kalok Chan,et al.  A Further Analysis of the Lead–Lag Relationship Between the Cash Market and Stock Index Futures Market , 1992 .

[20]  Adewale Abideen Adeyemi,et al.  Effect of Crude Oil Spot and Futures Price Volatility on South East Asia Islamic Equity Market , 2016 .

[21]  Stephen Figlewski.  Futures Trading and Volatility in the GNMA Market , 1981 .

[22]  John A. Doukas,et al.  Foreign currency futures and monetary policy announcements: An intervention analysis , 1986 .

[23]  Adnan Kasman,et al.  The impact of futures trading on volatility of the underlying asset in the Turkish stock market , 2008 .

[24]  G. Santoni.  Has programmed trading made stock prices more volatile , 1987 .

[25]  S. Spyrou.  Index Futures Trading and Spot Price Volatility , 2005 .

[26]  Allan Hodgson,et al.  The Impact of Index Futures Markets On Australian Sharemarket Volatility , 1991 .

[27]  Corredor Pilar,et al.  Does derivatives trading destabilize the underlying assets? Evidence from the Spanish stock market , 2002 .

[28]  A. Frino,et al.  Stock market automation and the transmission of information between spot and futures markets , 1999 .

[29]  Does Index Futures Trading Reduce Volatility in the Chinese Stock Market? A Panel Data Evaluation Approach , 2012 .

[30]  Sean Becketti,et al.  Will increased regulation of stock index futures reduce stock market volatility , 1990 .

[31]  Chi Xie,et al.  Cross-correlations between the CSI 300 spot and futures markets , 2013 .

[32]  A. Bahraminasab,et al.  Why Does The Standard Garch(1, 1) Model Work Well? , 2005 .

[33]  Kenneth C. Froewiss.  GNMA futures: stabilizing or destabilizing? , 1978 .

[34]  J. Geweke,et al.  Measurement of Linear Dependence and Feedback between Multiple Time Series , 1982 .

[35]  Janusz Brzeszczyński,et al.  Intra- and inter-regional return and volatility spillovers across emerging and developed markets: Evidence from stock indices and stock index futures , 2016 .

[36]  Daniel B. Nelson.  CONDITIONAL HETEROSKEDASTICITY IN ASSET RETURNS: A NEW APPROACH , 1991 .

[37]  Xuejun Fan,et al.  The spillover effect between CSI 500 index futures market and the spot market: Evidence from high-frequency data in 2015 , 2017 .

[38]  J. Corgel.  The Impact of GNMA Futures Trading on Cash Market Volatility , 1984 .

[39]  C. Aloui,et al.  Information transmission across stock indices and stock index futures: International evidence using wavelet framework , 2017 .

[40]  James Davidson,et al.  Econometric Modelling of the Aggregate Time-Series Relationship Between Consumers' Expenditure and Income in the United Kingdom , 1978 .

[41]  Giulia Iori,et al.  Avalanche Dynamics And Trading Friction Effects On Stock Market Returns , 1999 .

[42]  O. Ouda,et al.  How Option Markets Affect Price Discovery on the Spot Markets: A Survey of the Empirical Literature and Synthesis , 2009 .

[43]  W. Fuller,et al.  Distribution of the Estimators for Autoregressive Time Series with a Unit Root , 1979 .

[44]  F. Edwards,et al.  Does Futures Trading Increase Stock Market Volatility , 1988 .

[45]  C. Granger.  Investigating Causal Relations by Econometric Models and Cross-Spectral Methods , 1969 .

[46]  M. Ausloos,et al.  Strategy for investments from Zipf law(s) , 2002, cond-mat/0210499.

[47]  Zouheir Mighri,et al.  Dynamic Conditional Correlation Analysis of Stock Market Contagion: Evidence from the 2007-2010 Financial Crises , 2013 .

[48]  Yusaku Nishimura,et al.  Intraday Volatility and Volume in China's Stock Index and Index Futures Markets† , 2015 .

[49]  Martin T. Bohl,et al.  The effect of index futures trading on volatility: Three markets for Chinese stocks , 2015 .

[50]  A. F. Darrat,et al.  Has futures trading activity caused stock price volatility , 1995 .

[51]  Shiqing Xie,et al.  Index Futures Trading and Stock Market Volatility in China: A Difference‐in‐Difference Approach , 2014 .

[52]  Generalized (m, k)-Zipf Law for Fractional Brownian Motion-Like Time Series with or Without Effect of an Additional Linear Trend , 2003, cond-mat/0209306.

[53]  S. Johansen.  Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models , 1991 .

[54]  S. Johansen.  STATISTICAL ANALYSIS OF COINTEGRATION VECTORS , 1988 .

[55]  George E. P. Box,et al.  Intervention Analysis with Applications to Economic and Environmental Problems , 1975 .

[56]  M. Dempster,et al.  Long term spread option valuation and hedging , 2008 .

[57]  Ahmet K. Karagozoglu,et al.  Growing pains: The evolution of new stock index futures in emerging markets , 2016 .

[58]  F. Edwards.  Futures trading and cash market volatility: Stock index and interest rate futures , 1988 .

[59]  B. Mandelbrot.  The Variation of Certain Speculative Prices , 1963 .

[60]  Min-Hsien Chiang,et al.  The impact of futures trading on spot index volatility: evidence for Taiwan index futures , 2002 .

[61]  H. Theil.  Introduction to econometrics , 1978 .

[62]  Jerzy A. Filar,et al.  Australian electricity market and price volatility , 2016, Ann. Oper. Res..

[63]  J. Zakoian.  Threshold heteroskedastic models , 1994 .

[64]  R. Engle.  Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation , 1982 .

[65]  C. Granger.  Some properties of time series data and their use in econometric model specification , 1981 .

[66]  Mahmoud Wahab,et al.  Price dynamics and error correction in stock index and stock index futures markets: A cointegration approach , 1993 .

[67]  G. Schwert.  Why Does Stock Market Volatility Change Over Time? , 1988 .

[68]  C. Jochum,et al.  Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currencies? , 1998, SSRN Electronic Journal.

[69]  Dimitrios V. Vougas,et al.  Lead-lag relationship between futures and spot markets in Greece: 1999 - 2001 , 2007 .

[70]  Dean Furbush,et al.  Program Trading and Price Movement: Evidence from the October 1987 Market Crash , 1989 .

[71]  A. Ghosh.  Cointegration and Error Correction Models: Intertemporal Causality Between Index Spot and Future Prices , 1993 .

[72]  C. Sutcliffe,et al.  The Effect of Futures Market Volume on Spot Market Volatility , 2001 .

[73]  Hong Miao,et al.  Role of index futures on China's stock markets: Evidence from price discovery and volatility spillover , 2017 .

[74]  Jin-Chuan Duan,et al.  Option valuation with co-integrated asset prices , 2000 .

[75]  Biao Guo,et al.  A Tale of Two Index Futures: The Intraday Price Discovery and Volatility Transmission Processes Between the China Financial Futures Exchange and the Singapore Exchange , 2012 .

[76]  L. Glosten,et al.  On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks , 1993 .

[77]  C. Granger,et al.  Co-integration and error correction: representation, estimation and testing , 1987 .

[78]  Chong Wu,et al.  Intraday dynamic relationships between CSI 300 index futures and spot markets: a high-frequency analysis , 2015, Neural Computing and Applications.

[79]  T. Bollerslev,et al.  Generalized autoregressive conditional heteroskedasticity , 1986 .

[80]  W. Simpson,et al.  The effect of futures trading on the price volatility of gnma securities , 1982 .

[81]  Werner Kristjanpoller,et al.  Gold price volatility: A forecasting approach using the Artificial Neural Network-GARCH model , 2015, Expert Syst. Appl..

[82]  Werner Kristjanpoller,et al.  Forecasting volatility of oil price using an artificial neural network-GARCH model , 2016, Expert Syst. Appl..

[83]  A. Bhattacharya,et al.  The causal relationship between futures price volatility and the cash price volatility of GNMA securities , 1986 .

[84]  Christos Floros,et al.  Index futures trading, information and stock market volatility: The case of Greece , 2006 .

[85]  Steven A. Dennis,et al.  Share price volatility with the introduction of individual share futures on the Sydney Futures Exchange , 1999 .

[86]  R. F. Gilbert,et al.  Stock Index Futures and Cash Market Volatility , 1989 .

[87]  Jing Zhao,et al.  Commodity derivatives pricing with cointegration and stochastic covariances , 2015, Eur. J. Oper. Res..

[88]  Qian Zhang.  Price Discovery on Stock Index Futures markets under Extreme Events: Evidence from China , 2018, European Scientific Journal, ESJ.

[89]  Lawrence Harris,et al.  S&P 500 Cash Stock Price Volatilities , 1989 .

[90]  M. Martens.  Measuring and Forecasting S&P 500 Index-Futures Volatility Using High-Frequency Data , 2002 .

[91]  Ning Zhang,et al.  An Empirical Study of China's Financial Stock Index Futures Effect on Stock Spot Market Based on CSI 300 , 2015, MUE 2015.