The Impact of Trading Restrictions and Margin Requirements on Stock Index Futures

22 Pages Posted: 14 Jul 2018

See all articles by Jianqiang Hu

Jianqiang Hu

Fudan University

Tianxiang Wang

School of Management, Fudan University

Wenwei Hu

Shanghai University of Engineering Science; Shanghai University - School of Management

Jun Tong

School of Management, Shanghai University

Date Written: June 22, 2018

Abstract

Under the assumption of no arbitrage opportunity, the price of stock index futures should be equal to the spot price of the underlying stock index, excluding capital costs, dividends, and trading costs. However, since stock index futures have been introduced to the Chinese market in 2010, their prices have consistently diverged from their theoretical values in a very significant way. By using an analytical model, we try to provide some explanations as to why this may happen. Our model shows that the divergence of stock index futures prices from their theoretical values may be due to various trading and regulatory constraints, such as position limits and margin requirements, which play significant roles in Chinese markets. This is also consistent with the common belief that the more restrictive trading and regulatory constraints are, the less liquidity and efficient financial markets are, hence the more likely it is that asset prices would deviate from their true values. Our empirical results on two major Chinese market indices, CSI300 and SSE50, validate the results obtained from our analytical model.

Keywords: Stock Index Futures, Market Liquidity, Margin Requirement, Position Limit

JEL Classification: G12, G13

Suggested Citation

Hu, Jianqiang and Wang, Tianxiang and Hu, Wenwei and Tong, Jun, The Impact of Trading Restrictions and Margin Requirements on Stock Index Futures (June 22, 2018). Available at SSRN: https://ssrn.com/abstract=3201789 or http://dx.doi.org/10.2139/ssrn.3201789

Jianqiang Hu

Fudan University ( email )

670 Guoshun Road
Siyuan Building, Room 508
Shanghai, 200433
China

HOME PAGE: http://www.fdsm.fudan.edu.cn/en/teacher/preview.aspx?UID=91946

Tianxiang Wang

School of Management, Fudan University ( email )

670 Guoshun Road YangPu District
Shanghai, 200433
China

Wenwei Hu

Shanghai University of Engineering Science

shanghai, 201620
China

Shanghai University - School of Management

102/204,1390 Shangda Rd
Shanghai, 200444
China

Jun Tong (Contact Author)

School of Management, Shanghai University ( email )

99 SHANGDA ROAD
Shanghai, SHANGHAI 200444
China

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