Price Discovery in Index Futures Market - Based on Common Factor Models

Basing Permanent-Transitory Model and Information Shares Model, this paper studies the contribution on price discovery of CSI 300 index futures market, using 1 minute, 5 minutes and daily data. Permanent-Transitory Model shows that CSI 300 index futures market plays a more important role in price discovery than does the cash market. Information Shares Model shows that the higher frequency of data, the more contribution of the futures market on price discovery: using 1 minute data, the information shares of CSI 300 index futures market is 80.53%, while using daily data, the information shares of CSI 300 index futures market nearly equals to that of the cash market. The empirical results also show that the correlation between index futures market and cash market increases as data frequency lower.