Intraday Price Discovery and Volatility Transmission in Stock Index and Stock Index Futures Markets: Evidence from China

Abstract

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 drastic falling 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, 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.

Keywords: Chinese Stock Index Futures Market, Intraday, Recursive Cointegration Analysis, Multivariate GARCH

JEL Classification: C32, G13, G14