Does Index Futures Trading Reduce Volatility in the Chinese Stock Market? A Panel Data Evaluation Approach

28 Pages Posted: 16 Apr 2013

See all articles by Haiqiang Chen

Haiqiang Chen

Xiamen University

Qian Han

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Yingxing Li

Xiamen University

Kai Wu

Xiamen University

Date Written: June 15, 2012

Abstract

This paper investigates the effect of introducing index futures trading on the spot price volatility in the Chinese stock market. We employ a recently developed panel data policy evaluation approach (Hsiao et al. 2011) to construct counterfactuals of the spot market volatility, based mainly on cross-sectional correlations between the Chinese and international stock markets. This new method does not need to specify a particular regression or a time series model for the volatility process around the introduction date of index futures trading, and thus avoids the potential omitted variable bias caused by uncontrolled market factors in the existing literature. Our results provide empirical evidence that the introduction of index futures trading significantly reduces the volatility of the Chinese stock market, which is robust to different model selection criteria and various prediction approaches.

Keywords: Index futures, Spot market volatility, Panel data, Chinese stock market

JEL Classification: G14, G1, G15

Suggested Citation

Chen, Haiqiang and Han, Qian and Li, Yingxing and Wu, Kai, Does Index Futures Trading Reduce Volatility in the Chinese Stock Market? A Panel Data Evaluation Approach (June 15, 2012). Available at SSRN: https://ssrn.com/abstract=2250996 or http://dx.doi.org/10.2139/ssrn.2250996

Haiqiang Chen

Xiamen University ( email )

Xiamen, Fujian 361005
China

Qian Han (Contact Author)

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 361005
China

HOME PAGE: http://www.wise.xmu.edu.cn/viewNews.asp?id=2422

Yingxing Li

Xiamen University ( email )

Xiamen, Fujian 361005
China

Kai Wu

Xiamen University ( email )

Xiamen, Fujian 361005
China

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