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Using high-frequency data, this study investigates intraday price discovery and volatility transmission between the Chinese stock index and the newly established stock index futures markets in China. Although the Chinese stock index started a sharp decline immediately after the stock index futures were introduced, the cash market is found to play a more dominant role in the price discovery process.
The new stock index futures market does not function well in its price discovery performance at its infancy stage, apparently due to high barriers to entry into this emerging futures market. Based on a newly proposed theoretically consistent asymmetric GARCH model, the results uncover strong bidirectional dependence in the intraday volatility of both markets. Highlights Using intraday high-frequency data, this study, for the first time to our knowledge, investigates intraday price discovery and volatility transmission between the Chinese stock index and the newly established stock index futures markets in China.
Although the Chinese stock index started a sharp decline immediately after the stock index futures were introduced, we find that the cash market plays a more dominant role in the price discovery process. The new stock index futures market does not function well in its price discovery performance at its infancy stage. A possible explanation for the finding is that higher barriers to entry, which practically exclude many informed traders including many domestic individual investors and foreign investors, result in weakened price discovery ability.
The finding is different from many previous studies reviewed in Brenner and Kroner and Yang, Bessler, and Leathambut is consistent with recent findings on currency futures markets e.
Furthermore, this finding binary options providers best strategy to win simple and! also in line with that of Chen and Gauwho show that the stock index contributes more to price discovery than index futures and index options in Taiwan.
In addition, the results indicate strong bidirectional intraday volatility dependence in these two markets, suggesting that the volatility originated in either the Chinese stock or futures markets would transmit to the other. In sum, China's emerging futures market is not informationally dominant at its infancy stage of development.
In this sense, the stock index futures did not play a primary role in leading the drastic drop stock index options china the cash market price. Finally, the results suggest that only the positive lagged basis has a significant positive effect stock index options china the volatilities of both markets and their conditional covariance, which is consistent with the theoretical prediction of Kogan et al. It is also documented that the positive lagged basis has a larger positive impact on the volatilities of the cash market than that of the futures market.
Future research may be fruitful to examine many other aspects of the important Chinese stock index futures market, including revisiting the issues under study in this study when the market is more developed with lower barriers to entry and changes of the regulation.
As investors did not have the stock index options china to short stocks in Stock index options china, investors can now implement short sales due to the opening of the futures market. Thus, the introduction of the stock index futures contract might be responsible stock index options china the sharp stock index options china in the stock index after the launch of the futures market. The issue deserves further investigation. Nevertheless, it is totally an empirical question to determine whether a futures market might perform stock index options china price discovery function.