China’s stock index futures (the CSI300) is the first market in mainland China where futures on Chinese stock indices can be bought. The CSI300 is a large market dominated by predominately private Chinese retail investors as opposed to institutional investors, which is rather atypical for an emerging market. This paper examines whether the introduction of the CSI300 had an impact on the volatility of the underlying spot market. Different varieties of Generalized Auto-Regressive Conditional Heteroscedasticity (GARCH) models were estimated for mainland China and compared with the A50 and HSCEI spot and derivatives markets in Singapore and Hong Kong. At the same time, spillover effects between the three markets were modelled. Overall, we find robust evidence that the introduction of the CSI300 had a calming effect on the volatility of the CSI300 spot index, as well as on both the A50 and HSCEI spot markets. Differences in the types of investors, the tightly regulated nature of China’s futures market, together with the existence of two sister markets in the region where comparable stocks are traded, may well combine to explain why China’s market resembles its counterparts in mature economies more so than in emerging markets.
The Effect of Index Futures Trading on Volatility: Three Markets for Chinese Stocks
CIGI Paper No. 44