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The evolving nature of intraday price discovery in the Chinese CSI 300 index futures market

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Abstract

This paper reports a study of the evolution of the intraday price discovery of the Chinese CSI 300 stock index futures, utilizing minute-by-minute data for the two consecutive periods of April 16, 2010–July 30, 2010 and August 2, 2010–June 15, 2011. Innovatively, the empirical analysis employs a no-arbitrage-based error correction model (ECM) between the index and the theoretical index implied by the futures’ price. It is found that futures followed the index in the first period, but evolved to lead the spot in the second period. Interestingly, however, futures led within 30 min of the spot’s opening in each trading day, even in the initial first period of the futures trading. Fortuitously, the ECM seems to yield reasonable estimates for the arbitrage cost.

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Notes

  1. Data for January 2013 (from www.cffex.com.cn).

  2. Those are the trading hours for the two Chinese stock markets. The CSI 300 index futures trade from 9:15 to 11:30 a.m. and from 13:00 to 15:15 p.m.

  3. After the market is closed each day, the number of shares for computing the index, which may differ from the number of shares outstanding, is provided to fee-paying clients by China Securities Index Co., Ltd.

  4. At any time, four CSI 300 index futures on the March cycle are traded. Trading of a contract ends on the third Friday of its delivery month.

  5. It is also commonly called the cost-of-carry model. Note that even though short sales of stocks were not allowed at that time, the fair price formula still holds because the CSI 300 index represents an investment asset (Hull 2009).

  6. This was suggested by Jun Liu.

  7. Available from www.chinamoney.com.cn/fe/Channel/19438.

  8. The China Stock Market and Accounting Research (CSMAR) Database includes markets data and financial statements of public traded companies in China and is now part of the Wharton Research Data Services (WRDS).

  9. For completing an arbitrage with a round-trip of trading stocks, the total transaction cost amounts to roughly 18 points, given an index at 3000 points (see Sect. 3 for assumptions).

  10. We thank an anonymous referee for identifying a possible mistake in our initial statement.

  11. The entire model may not be estimable with two constants c and \(\mu _1\) or \(\mu _2\). A second anonymous referee is thanked for noting this.

  12. Rittler (2012) employed the theoretical and market prices of futures in VECM, which may still be prone to the basis-bias.

  13. VECM parameters can be estimated by either maximum likelihood (MLE) or ordinary least squares (OLS), which are equivalent asymptotically. The residual series from MLE show significant autocorrelation and heteroscedasticity, however. Therefore, the reported VECM model is estimated by OLS, and the inference utilizes the Newey–West standard errors.

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Acknowledgments

This research is not possible without the vital support of Pin Ren and the frequent encouragement of Jun Liu. Gang Xiong helped with data preparation initially. Ronghua Luo provided guidance for the econometric methods used in the paper. Shuxin Guo proofread the manuscript. The authors are truly grateful to two anonymous reviewers for helpful comments and to Editor Anderson for constructive suggestions. The work is supported by a National Natural Science Foundation of China Grant (No. 71271173) and by Huaxi Futures Co., Ltd.

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Authors and Affiliations

  1. School of Finance, Southwestern University of Finance and Economics, Chengdu, Sichuan, People’s Republic of China

    Qiang Liu

  2. School of Mathematics, Southwest Jiaotong University, West Zone, High-tech District, Chengdu, 611756, Sichuan, People’s Republic of China

    Gaoxiu Qiao

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  1. Qiang Liu
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  2. Gaoxiu Qiao
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Correspondence to Gaoxiu Qiao.

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Liu, Q., Qiao, G. The evolving nature of intraday price discovery in the Chinese CSI 300 index futures market. Empir Econ 52, 1569–1585 (2017). https://doi.org/10.1007/s00181-016-1115-3

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  • DOI: https://doi.org/10.1007/s00181-016-1115-3

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