Role of index futures on China's stock markets: Evidence from price discovery and volatility spillover

摘要

The introduction of stock index futures in China in 2010 marked an important development in the country's financial markets. It was however not without controversy as regulators blamed the futures market for its role in the stock market crash in 2015. This paper examines the intraday price discovery and volatility spillover relationship between the CSI 300 equity index and index futures in China. Results from the study, covering the period 2010-2015, reveal that index futures plays a dominant role in contributing towards price discovery, with an average yearly information share of about 67%. The price leadership of the futures market, although found to be strong, is diminished in the presence of stringent regulatory trading curbs that were put in place as a response to the crisis. Furthermore, investigation into volatility spillover documents significant return and volatility shocks transmitted from the stock market to the futures market. The evidence, which contradicts regulatory claims, is explained in the context of the unique institutional trading structure in China.