First, there are less market frictions in the futures market than in the underlying spot market. If futures prices adjust quickly to new information and the effect is transferred to the spot market through arbitrage between the two markets, then the futures market would function to help reduce market frictions in the spot market. So, the introduction of futures trading in China is expected to increase both stock price volatility and the trading efficiency in the spot market.
Secondly, considering that market participants have less information on non-CSI 300 stocks than CSI 300 stocks, the futures market information would become valuable not only to investors on CSI 300 stocks but also to those on less recognized CSI 300 stocks. So, the futures trading would produce more trading in non-CSI 300 stocks than without its trading, leading to an increase in both spot price volatility and trading efficiency of non-CSI 300 stocks.
Thirdly, the market regulations and restrictions would contribute to the stabilization of the underlying stock market by reducing spot price volatility of the underlying stocks, especially when the markets are extremely volatile as financial crisis does. However, these market restrictions would disturb the efficient transfer of futures market information into the pricing of t...
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...x would be more volatile during the last hour of trading on the expiration day.
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
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