The Impact of CSI 300 Index Futures Introduction on Underlying Stock Liquidity

Posted: 8 May 2013

See all articles by Peng William He

Peng William He

The University of Sydney

Andrew Lepone

University of Sydney; Financial Research Network (FIRN)

Date Written: May 7, 2013

Abstract

This paper examines liquidity in the China stock market around the introduction of the CSI 300 Index Futures contract. Two competing hypotheses are tested. Liquidity of constituents stocks in the underlying index may worsen as passive and uninformed investors migrate to the futures market. On the other hand, underlying stock market liquidity may improve if the index futures attract more informed investor and promote price discovery through the creation of a short selling avenue. Analysis in this study suggests that liquidity of the CSI 300 stocks decreases after the introduction of the CSI 300 Index Futures, after controlling for factors generally known to affect stock liquidity such as volume and volatility. We investigate the subject further by considering commonality in liquidity, and find that the results are robust after controlling for market wide conditions. This study further tests the effect of the introduction of the stock index futures on the volatility of the index, and finds an increase in conditional volatility in under the GARCH (1, 1) framework.

Keywords: index futures, market quality, liquidity

JEL Classification: G15

Suggested Citation

He, Peng William and Lepone, Andrew, The Impact of CSI 300 Index Futures Introduction on Underlying Stock Liquidity (May 7, 2013). Available at SSRN: https://ssrn.com/abstract=2262051

Peng William He (Contact Author)

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Andrew Lepone

University of Sydney ( email )

University of Sydney
Sydney NSW 2006, NC
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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