The Effect of CSI 300 Index Futures Trading on the Chinese Stock Market

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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
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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 purpose of market stabilization
5.2 On arbitrage trading
We have considered index arbitrage opportunities in the KOSPI 200 futures and cash markets during 5/3/1996 – 8/31/2001 period. We considered both an ex ante arbitrage profit and ex post arbitrage profit. First, even though the Korean market has grown, both the frequency of mis-pricing and the degree

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