The launch of stock index futures is a milestone in the development of Chinese financial markets. In the past few years, Chinese stock market was characterized as one of the most dynamic developing markets, and also the most volatile one. It rose about 97 percent in 2007, then plunged more than 65 percent in 2008 and rebounded about 80 percent in 2009. The investors and regulatory authorities hope that introduction of stock index futures trading will help increase liquidity in the stock market, reduce market fluctuations and hedge risks.
As financial futures have just been launched in China, the effect of financial derivatives trading on the underlying stock markets has been of great interest to both investors and regulators. Considering the beginning stage of futures trading, related researches and empirical results in developed derivatives markets will not only help assess the economic usefulness of derivatives markets but also help build a more effective and stable market in China. This paper purports to contribute these aims by introducing some empirical researches in Korean derivatives market and discussing implications to Chinese markets.
This paper will mainly discuss on the following two topics related to the stock index futures. First, derivative trading offers a strong welfare effect to the market and economic growth by risk shifting mechanism and the price discovery facility. Transfer of risk enables market participants to expand their volume of activity. It gives sure opportunity to develop the financial system and the macro economy. Also, in a market where information asymmetry and market friction are recognized, derivatives trading gives a better opportunity to earn money from the information differences and hence...
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...ing, and its implication to the Chinese market. Chapter 5 concludes the paper.
Works Cited
Brorsen, B. W., 1991, Futures Trading, Transaction Costs, and Stock Market Volatility, Journal of Futures Markets 11, 153-163.
China Securities Regulatory Commission (CSRC) Annual report 2008, CSRC
Cox, C.C., 1976, Futures Trading and Market Information, Journal of Political Economy 84, 1215-1237
Jae Ha Lee, February 2002, Index Arbitrage with the KOSPI 200 Future
Leading Futures Market KRX, Korea Exchange
Ross, S. A., 1989, Information and Volatility: The No-arbitrage Martingale Approach to Timing and Resolution Irrelevancy, Journal of Finance 44, 1-17.
Sung C. Bae, Taekho Kwon, and Jongwon Park, 2004, Futures Trading, Spot Market Volatility, and Market Efficiency: The Case of the Korean Index Futures Markets, Journal of Futures Markets 24, 1195-1228
Pennings, Joost M.E. Research in Agricultural Futures Markets: Past Present and Future. Presentation Paper: Wageningen Agricultural University: Netherlands. 8 June 2001.
Until recently, managed futures strategies offered high probabilities to deliver positive returns, with very low correlation to equity and fixed income markets, and the ability to perform best during any financial crisis. When the dust settled on 2008, managed futures industry outperformed all other markets. Post-financial crisis, only two markets produced positive returns: managed future funds and fixed-income. The average manage future fund rose 18 percent, while many individual managed future funds were up 40 percent.1 Conversely, all other markets on average took a significant drawdown, US stocks declined 37 percent, REITs declined 37.34 percent, Int’l stocks declined 43.39 percent, and commodities declined 48.49 percent.2 Managed future funds positive performance in such a negative environment opened the eyes of many investors, and infused a rapid demand for managed future funds. Assets in managed futures strategies grew 120 percent from 2007 to 2011, totaling to 188 billion...
The behaviour of markets and investors, the decision making in the market place and the dynamics of demand and supply in any given market cannot be determined with a hundred percent accuracy. However master minds in the past have designed various techniques and theories that help investors make a particular buying decision, or to make choices logically. These theories and techniques help today’s investors to peep into the future and make almost immaculate predictions regarding the future behaviour of the market and the ongoing trends. A lay man night view the decision making of an investor as being solely based upon speculation but in reality every move that an investor makes today in the market place is backed up by sound calculation and theories. Two of the most talked about and essential theories or concepts that are related to the market dynamics and that will be discussed at length in this assignment are Efficient Market Theory and Behavioural Finance.
In this paper, we discuss the effect of CSI 300 index futures trading on the Chinese stock market. Specifically, we focus on the two topics (1) price volatility and efficiency of market, and (2) the arbitrage trading
Secondly, as one of the most well developed stock market, UK market locates in the similar developing stage as US market does, adequate data ensure the reliability of the research. Finally, both USA and UK market play a critical role in modern financial system, experience from these two markets could be contributive.
Efficiency of financial markets is one of the main topic in finance area for researching and testing. Many economist has done lots of research on this important area and intent to find out a best way to illustrate the outcome to define the financial market. In recent years, the research and the testing has become the basis of the investors to examine the investment stages. This move is important since the market can change in any time.
The concept of 'efficient market hypothesis' was introduced by Eugene Fama in mid-1960s. According to this concept, the powerful struggle in the capital market leads to reasonable valuing of debt and equity securities. The perception is based on the replication of related evidence in market prices of the securities. If only past information is reflected in 'weak-from efficient markets; past as well as present information is reflected in 'semi-strong form efficient markets'; past, present, and future information is reflected in 'strong-form efficient markets'.
Since the listing of KOSPI 200 futures in May 1996, the derivatives market has grown into one of the key derivatives markets in the world. In the meantime, the market has achieved a higher level of excellence in market operation and secured a trading system and fair market management, and consequently figures as a decent reference among derivatives markets. The brief history of Korean derivatives market related to the products is as follows:
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
Uses of futures contract highlight the importance of existence of future markets. However, from the beginning, manipulation is rampant in a futures market (Markham, 1991). Manipulation is blamed since it disturbs two primary functions of futures market, which are risk transfer and price discovery. Manipulation distorts price discovery by forcing improper motive other than legitimate demand and supply. As a result, manipulation reduces the efficiency in futures market. Regulators, therefore, are set to prevent the spread of manipulation but it turned out that the regulators were not able to stop the manipulation. The main reason for unsuccessfulness was that neither regulations nor acts have clear definition of manipulation.
HFT is one example of modern technological advances that exerts a great influence to the stock trading market. Some small and limited forms of algorithm trading with the use of mathematical and computerized formula for decision-making were being used by financial companies for decades. As time goes on, the size and scope of trading is expanding its area of business and is finding its way for public acceptance. In accordance to such expansion, the regulators and stock traders are expected to reconsider its potential consequences and prevent any manipulation or wrongdoings from occurring.
Since the originative works of Fama (1965 and 1970), where an efficient market from the informational execution point of view was defined as one where “stock prices ‘fully reflect’ all available information” (Fama 1970) and market efficiency was categorized into three levels: weak-form, semi-strong form and strong-form. First of all, the information set through weak form efficiency, reflects only the historical prices or returns. Second of all, the information set in semi-strong form efficiency, contains information available to all market participants. Lastly, in strong form efficiency, the information set consists of all information available to any market participant.
Following the trend of economy, it is important to investors to understand that strong economy creates strong stock market. To elaborate further, as stock prices are increased by current and future expectations of earnings, thus without a strong economy it would be difficult for the companies to increase and sustain their earnings (Kong 2013). The economy development is usually calculated using the gross domestic product of a countries. On the other hand, a change is the stock price can also cause a major impact to the consumers and investors directly. Hence, a loss in confidence by investors can cause a downturn in consumer spending in the long term, which will also affect the economy’s output (Aysen 2011). The graph below shows the relationship of stock market price (KLCI) and the GDP of Malaysia in 2009. Thus, it can be concluded that the economy and the stock market has a positive relationship.
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.