Stock index futures trading impact on spot price volatility. The CSI 300 studied with a TGARCH model

TL;DR

This study uses a TGARCH model to analyze how CSI-300 index futures trading influences spot market volatility, finding that futures trading reduces volatility and improves spot price predictability.

Contribution

It demonstrates that TGARCH modeling effectively captures the impact of futures trading on spot market volatility and establishes a stationary relationship between the two markets.

Findings

Futures trading significantly reduces spot market volatility.

A stationary equilibrium exists between spot and futures markets.

Spot prices are more accurately predicted with 3-4 day lag models.

Abstract

A TGARCH modeling is argued to be the optimal basis for investigating the impact of index futures trading on spot price variability. We discuss the CSI-300 index (China-Shanghai-Shenzhen-300-Stock Index) as a test case. The results prove that the introduction of CSI-300 index futures (CSI-300-IF) trading significantly reduces the volatility in the corresponding spot market. It is also found that there is a stationary equilibrium relationship between the CSI-300 spot and CCSI-300-IF markets. A bidirectional Granger causality is also detected. ''Finally'', it is deduced that spot prices are predicted with greater accuracy over a 3 or 4 lag day time span.