evidence from csi index future and hsi index finance essay

8/20/2019 Evidence From Csi Index Future and Hsi Index Finance Essay

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Evidence From Csi Index Future And Hsi Index Finance Essay

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The CSI !! index "uture #as launched $y China Financial Future Exchange in April%

&!'! a"ter "our years o" mock trading. It has $een traded "or (ust more than t#o years

$y the time o" #riting. The underlying asset o" CSI !! index "uture is the CSI !!

index #hich is consist $y the !! selected companies list on either Shanghai or

Shen)hen stock exchange. These companies covered more *!+ o" the market value

and can $e seen as the representatives o" the market general per"ormance. As the

only practical tool to short in Chinese stock market a"ter the last put option expired

in &!!,% the CSI index "uture plays a prominent role since its $irth and develops

-uickly. Chinese stock market is di""erent "rom most o" the developed market in

structure since most o" its participants are individual investors./a and Chu% &!!,0

The high entry standard o" the index "uture market makes its participants

distinguished "rom those in the underlying market. The asymmetrical structure

caused an un$alanced pro$lem $et#een the "uture and spot markets. According to

the report "rom Haitong Securities&!'!0% the annuali)ed ar$itraging return reached

'&!+ in the "irst three months. The un$alance attracted massive ar$itraging #hich

signi"ied the volatility o" the market and made the CSI index experienced a sharp

drop in that period. Such return dropped -uickly to '1+ in one year time and

sta$ili)ed to a$out 1+ percent recently. Such phenomenon makes the trading data

"rom the "irst year unsuita$le to study the market #ith purpose o" studying the

normal trading.

2uring recent years% as more and more mainland3s companies $eing selected into

Hang Seng Index and $ecause o" the gro#ing capital "lo# $et#een Hong 4ong and

mainland China% the interactions $et#een the t#o markets is $ecoming more andmore signi"icant% #hich #ill surely a""ect the trading activity in the t#o index "uture

markets. Although the market depth and the level o" internationali)ation are -uite

di""erent% such phenomenon provides a good chance to study the gro#th and

characters o" Chinese index "uture market $ased on the comparison #ith the

Hangseng index "uture market. Hong 4ong market is one o" the most deeply traded

markets in the #orld. The stock market in Hong 4ong has a history o" more than '!!

years. The Hang Seng index "uture has $een traded since '55&% and is one o" the most

in"luential index "uture markets in Asia. In the recent years% as more mainland

companies $ecoming the constituent stocks and the surging o" mainland economy%


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the relationship $et#een the mainland market and Hong 4ong market is much more

signi"icant than $e"ore. Such tendency is likely to $e continued% #hich makes it

meaning"ul to study the relationship $et#een the t#o index "uture markets.

This study "ocuses on the characters o" volatility in $oth markets "rom the vie# o"

di""erent types o" participants. In the modern "inancial market% the volatility is much

more essential than the direction o" the price. The hedgers $uild positions on "uture

to get rid o" the volatility6 the speculators and ar$itragers seek pro"it "rom volatility.

The volatility is the most essential element in "uture market% the monthly clearing

policy makes the $uy7and7hold strategy impractical. 8ean#hile% di""erent traders eye

on volatilities $ased on di""erent time span. 8ost o" the speculators and ar$itragers

put the intraday volatility as their "irst concern "or daily trading. 9hile volatility

$ased on daily data are essential "or the investor and also "or speculators to maketrading plan. /oth types o" volatilities are studied in the literature.

The :arman74lass ;olatility'5,!0 is used in order to study the intraday volatility.

The literature compares the covariance $et#een the volatility o" the index "uture and

underlying market% and investigates the interactions $et#een the t#o markets3

volatility. This can give a $asic sense o" the maturity o" ar$itraging and the

e""ectiveness o" hedging in the t#o markets since in a mature index "uture market%

the intraday volatilities o" the "uture market and the spot market should $e highly

correlated regard to speedy ar$itraging. As stated a$ove% the ar$itraging in CSI !!

index "uture market has (ust stepped out o" the in"ant stage in the recent year. The

study explores the covariance $et#een the volatility o" "uture and spot markets and

compares the results get "rom CSI and Hang 4ong markets. ;A< model is used t#ice.

The "irst model aims at studying the causality $et#een the intraday volatility #ith

trading volume and market depth. The second model is used to study the lead7lag

relationship o" the intraday volatility in the t#o markets and then add volume and

open interests as exogenous varia$les to study their in"luence on the daily

movement. Impose response "unction is generated to study the path o" in"ormation

"lo# $et#een the "uture market o" mainland China and Hong 4ong. The result

suggests that higher margin should $e le"t "or the hedgers in Chinese stock market%

and compared #ith the developed market in Hong 4ong% the ar$itraging return is

still higher in China. The result "rom this study supports the opinion that the Chinese

stock market can $ring signi"icant in"luence to the Hong 4ong3s market in recent

years. The shock in the intraday volatility o" Hang Seng index "uture #ill $ring

impact to the CSI !! index "uture in the reverse direction. /ut the impact is not

signi"icant. /oth markets can digest the shock "rom their o#n -uickly. The overshot


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#ill come in the second period on $oth paths. The intraday volatility in the market is

"ound to $e granger caused $y the log "orm o" volume and open interest.

The =hillip7=erron'5,,0 test and A2F test are used to test the stationary o" the

closing price. Surprisingly% the results indicate there is no unit root in $oth series o"

data% $ut most o" the "inancial data are not stationary. The main reason "or this can

$e due to the short time span. The limited num$er o" daily data cannot re"lect such

relationship signi"icantly. Ho#ever% the shortage in data #on3t in"luence the process

to study the volatility prediction. The trading volume and open interest is separated

into expected portion and unexpected portion. To do the volatility production% the

A A revie# o" the theoretical and

empirical study on volatility o" index "uture #ould $e given in the $eginning. Thesource and a $asic analysis o" the data #ould $e stated in the section o" data and

descriptive statistics. In the section o" methods and methodology% a preliminary

description o" the methods involved #ill $e given and comes #ith an explanation and

theoretical consideration o" the econometric models. The intraday volatility study

$ased on ;A< model "ocuses on #hether there are signi"icant relationships #ith

trading volume and open interest and its lagged terms% and ho# a given extent o"

shock can a""ect the path o" the intraday volatility $et#een CSI !! index "uture and

Hang Seng index "uture. The results are stated and interpreted in empirical result.


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The conclusion is $ased on a summary o" "indings and recommending procedures

and #ill come in the end.

Literature review

The literature mainly "ocus on exploring the relationship $et#een volatility% volume

and market depth in CSI index "uture market and compare the results getting "rom

HSI index "uture market. The "ormer studies have documented a positive

relationship $et#een volatility and volume. The recent studies on the causality

relationships $et#een trading volume and volatility can $e dated $ack to the study

done $y /essem$inder and Seguin'550% their result sho#s the relationship is a

mixture o" contri$ution% #hich supported the hypothesis made $y Clark'5?0.

8assive studies have $een pu$lished $ased on their study. ater studies put moreindicators into model. Chartrath et al.&!!0 studied the importance o" open interest

in commercial "uture market and stated that the open interest re"lects the trading

activities "rom large hedgers. For index "uture market% the open interest also

indicates the $ehavior o" large hedgers #ho have a signi"icant position on underlying

stocks. /essem$inder and Seguin suggested open interest is the $est indicator "or

market depth. They separate the volume into t#o parts% the expected portion and the

unexpected one. sing a method similar to :A


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volume and price movements #ill $e a""ected $y such procedure% #hich #ill also

leads to a contemporaneous and positive change to volatility and volume. Ho#ever%

such statement is critici)ed to $e less sound $y later studies. Tauchen and =itts

'5,0 stated that returns volatility% trading volume and market depth are closely

related regarding to their study. They argued that traders #ill revise their asset

valuations a"ter the arrival o" ne# in"ormation. The disagreement among the traders

is the causes "or volume. 4yle '5,10 gave a more #idely accepted de"inition o"

market depth. /y 4yle3s study% market depth should $e interpreted as the order "lo#

re-uired moving prices $y one unit. The reason to use open interest as a

representative is that the change in open interest is endogenous to the change in

order "lo#. 4yle3s study pushed the research on the relationship $et#een "utures

price volatility and trading activity to a "urther step. Another theory developed in this

area is one called the dispersion o" $elie"s #hich is "irst promoted $y Harris and


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volume and volatility. 9ang and au &!!!0 on SD= 1!! index "uture "or the period

'55!75 indicates that contemporaneous volume can $ring a strong positive e""ect on

price volatility% #hile the e""ect "rom past volume is negative and relatively small.

Baco$y% Fo#ler and :ottesman &!!*0 gave an theoretical argument on ho# the

li-uidity issue can e""ect "inancial asset pricing. They took the spread cost into

consideration and $uild an ad(usted CA=8 model $ased on li-uidity. 9hen study

en and Chen &!!50 studied the relationship $et#een volatility% volume and open

interest o" Tai#an index "uture market and "ind that signi"icant relationship is

existed among the daily volatility% the lagged total volume and the lagged open

interest. =ati &!''0 later studied the relationship $et#een the "uture trading activity

and volatility in price o" the Indian stock "uture. sing the method introduced $y

/essem$inder and Seguin% the unexpected volume has a much more signi"icantimpact on volatility than the expected volume. The expected portion o" open interest

has a signi"icant negative relationship #ith volatility #hile its unexpected part does

not. Such result is $it di""erent "rom /essem$inder and Seguin3s study. Such

di""erence is contri$uted to the characters o" emerging market $y the author.

i&!''0 examines the secular relationship $et#een the li-uidity o" cash market and

the volatility o" stock index "utures in e# ork Stock Exchange SE0. The result

suggests that the -uarterly expected volume has a signi"icant explanatory po#er "or

the daily volatility o" main stock index "utures $ased on the companies list on SE.The studies a$out causality $et#een the indicators o" the spot and "uture markets can

also $e "ound. Chang and Chou &!!!0 studied the relationship open interest o" SD=

1!! "uture market and the volatility o" the underlying market% the result indicates

that there is a positive relationship $et#een the t#o varia$les. Such relationship can

$e interpreted as the increased volatility in the underlying market induces a higher

need "or hedging. ater on% Chartrath et al. &!!0 "urther studied this issue% they

separated the trader into "our groups as CFTC does% #hich including commercial

producer and consumers% spreaders% non7commercial reporta$le traders and other

traders. sing the #eekly report "rom CFTC% they concluded that the unexpected

change in the commercial positions has a positive relationship #ith intraday

volatility o" the "uture and its underlying3s market. Buan&!!50 examines the lead7leg

relationship in the SD= 1!! index "uture market and suggested that a unidirectional

directional relationship $et#een "uture market volatility and the spot market

volatility.

Among the most recent studies% the ;A


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nonlinear :A


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The CSI !! "uture market has (ust stepped into its third year. The study on this

market is limited $ecause o" the short time span. The researchers in China $egan to

"ocus on the volatility study since the introduction o" the index "uture. Among those

studies% the relative topic is done $y ang% ang and hou&!'&0 #ho studied the

intraday price discovery and volatility transmission in CSI "uture and underlying

market. The EC87:A

The covariance $et#een the intraday volatility o" the "uture and spot #ould $e

detected and compared $et#een the t#o markets. A $asic image o" the e""iciency o"

price e""iciency can $e got through this.

The $i7directional causality $et#een the intraday volatilities in CSI !! index "uture

and Hang Seng index "uture market. The impact "rom market depth and li-uidity #ill

$e considered.

The :A


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The data used in this literature is daily data collected "rom 9enhua Financial

2ata$ase% including daily opening price% daily closing price% daily high% daily lo#%

daily open interests and daily trading volume o" the most commonly traded contracts

in CSI !! index "uture market and Hang Seng index "uture market. The similar data

o" the t#o underlying markets are collected except "or the open interest #hich is

speci"ic data o" "uture markets. The CSI !! "uture market #as launched in April%

&!'!. It3s the "irst index "uture in mainland China. Ho#ever% considering the

shortages o" the "irst year3s trading stated in the introduction% only the data o" the

most recent year is selected% #hich starts "rom 5th% 8ay% &!'' till '&th% 8ay% &!'&.

The data includes the open price% close price% daily high and lo#% volume o" $oth the

"uture and spot markets in China and Hong 4ong. A"ter excluding the unmatched

date $et#een $oth markets% &, o$servations are selected in the end. The data are

collected "rom traded contract the most recent month.

A "e# ad(ustments are made in order to get rid o" the distur$ance caused $y spillover.

For CSI !! "uture market% the expiration date is the third Friday o" the current

month. There are signi"icant $reaks in trading volume and open interest during the

expiration #eeks. The traders are rolling their positions "rom the contract o" current

month to the ne#ly traded contract o" next month. Ho#ever% there3s no change in

participants and money involved during this procedure. For certain reason% the

trading volumes and open interests o" the t#o contracts are added together to matchthe data out o" expiration #eek. The in"ormation o" price is not changed since the

di""erence $et#een the t#o contracts is tiny. Hang seng index "uture contract is

expired on the second last trading day o" the contract month. The same ad(ustment is

made to the data o" the expiration #eek.

The daily return is generated $y the "ollo#ing e-uation>


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d is the normali)ed lo#% #hich is di""erence $et#een daily lo# and the closing price

c is the normali)ed close% #hich is the di""erence $et#een the opening price and the

closing price.

2escriptive statistics "or return series are reported in Ta$le ' and "or volatility series

are reported in Ta$le &.

Table 1

Future Contract

CSI 300 Future(ifr)

Han Sen Inde! Future ("sir)

Sa#ple Si$e

&,

&,

%ean (&)

7.!?

7.!*&!,

%a! (&)

1.*'*,

1.??,

%in (&)

7.1',&

71.,&?!

StD (&)


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'.*',

'.1*?,

S'ewness

.*!5

7.&,?&

!cess urtosis

'.,!**

'.?*'15'

Table *

Future Contract

CSI 300 ('vif)

Han Sen Inde! ('v"si)

Sa#ple Si$e

&,

&,

%ean (&)

.!''

.!!,,

%a! (&)

.!5,?

.&'?


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%in (&)

*.'5e7!

.e7!

StD (&)

.!',

.!'*

S'ewness

&.1?,51&

5.!11,

!cess urtosis

5.?&*?

''5.1?

23Agostino test'55!0 is used to test normality "or $oth the return and volatility

series% the results sho#ed in Ta$le sho#ed that "or all these "or series% the null

hypothesis has $een re(ected #hich means that they are not normally distri$uted.

The ske#ness and excess 4urtosis are signi"icant.

In Ta$le '% the mean daily returns o" $oth CSI !! "uture7!.!?+0 and Hang Seng

index "uture7!.!*&+0 are close to )ero #hich is typical "or "inancial data. The

slightly negative num$er may $e attri$uted to the asymmetric $ias in market due to

human $ehavior. The standard deviation is slightly larger "or Hang Seng Index

Future'.1*+0 compared to CSI !! Future'.*+0. /oth markets3 return exhi$its

excess kurtosis #hich is commonly seen in "inancial data series. The "at tail is

appeared to $e more o$vious in Hong 4ong3s market #ith an excess kurtosis o"

''5.1? compared #ith 5.?&*? in China3s index "uture market. The data stated in

Ta$le & indicates that the intraday volatility is higher in CSI !! Future market

!.!'+0 compared to Hang Seng Index "uture market !.!!5+0. The standard

deviations o" the t#o markets are nearly the same% #hich $rings a $asic sense that thedaily "luctuations o" the t#o markets may $e correlated. The index "uture market in


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Hong 4ong re"lects a much higher kurtosis ''5.*0 than the same market in

mainland China 5.?0. Such phenomenon can $e caused $y the reason that in most

cases% the opening price o" Hang Seng Index is highly e correlated #ith the "ormer

day3s per"ormance o" American stock markets #hich are closed hours $e"ore the

Hang Seng index "uture $egins to $e traded. Ho#ever% according to H#ang&!'&0%

China3s stock market is the only marketin Asia #hich doesn3t have a signi"icant

linkage #ith the American stock market. The (umps in opening price induce a much

higher kurtosis "or data "rom Hang Seng Index Future.

Table 3

+ariables

,r(S'ewness)

,r(urtosis)

c"i*(*)

,rob-c"i*

Ifr

!.!!*

!.!!&

'?.'1

!.!!&

Hsir

!.!?

!.!!!

'*.5&

!.!!!&


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.'vif

!.!!!

!.!!!

'1.',

!.!!!!

.'v"si

!.!!!

!.!!!

'*.5

!.!!!!

/e"ore moving to the "uture steps% the stationary needs to $e checked "or all the

varia$les that #ould $e used as exogenous varia$les in regression later. The =hillip7

=erron test and Augmented 2ickey7Fuller test are $oth used to assess the stationaryo" volume and open interest across the $oth markets. The volume and open interest

data are processed into logged "orm. The results are stated in Ta$le .

Table /

DF test

,"illip,erron test

+olu#e

2I

+olu#e

2I

CSI 300


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7*.',*LLL

7'.?'?

71*.!5LLL

71.?5&LLL

71.!?'

7'.&?

Han Sen Inde!

7*.51LLL

71.!?LLL

7,!.?'!LLL

7*.5*!LLL

71!.,'5LLL

71.&5&LLL

Superscript LLL% LL% L% represent '+% 1+% '!+ signi"icance level.

The results "rom $oth tests sho# that the total volume is signi"icant at '+ level "or

$oth markets. Ho#ever% the open interest data "rom CSI !! "uture market is not

signi"icant at any level #hile the open interest data "rom Hong 4ong market is

signi"icant at '+ signi"icant level. Since the null hypothesis o" unit root cannot $ere(ected "or the open interest data o" CSI !! "uture% this series cannot $e used as an

exogenous varia$le in the later model. The unit root e""ect in CSI !! market is

caused $y the signi"icance gro#th in open interest during last year. The Figure '

exhi$its this rapid gro#th.

The reason "or the gro#th can $e due to t#o main reasons. ne is that the index

"uture market has (ust stepped out its in"ant stage% the rapid gro#th in the num$er o"

participants and the increasing use o" hedging strategy $oth contri$ute to the gro#th

in open interest. Secondly% the =eople3s /ank o" China increased the reserve


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re-uirement ratio six times "rom '5+ to &'.1+ percent in the "irst hal" o" &!''% #hich

signi"icantly decrease the market li-uidity. The inter$ank o""ered rate SHI/

9here u is the normali)ed high% #hich is the di""erence $et#een daily high and

opening price%

d is the normali)ed lo#% #hich is di""erence $et#een daily lo# and the closing price

The original model is critici)ed as it "ailed to consider the (oint e""ect o" daily high%

daily lo# and closing price. sing the method o" analytic scale7invariant estimators%

a"ter ad(ust the optimal value% the "ormula o" :4; comes as>

9here c is the normali)ed close% #hich is the di""erence $et#een the opening price

and the closing price.

The :4; as calculated "or all the "our markets contained in the sample% and use as

the representative "or intraday volatility.

+4 #odel

Follo#ing the studies o" en and Chen &!!50% ;A< model is applied to study the

characters o" intraday volatility and the causality relationship #ith market depth and

li-uidity. The order o" the ;A< model should $e checked in this case. The study uses


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the Akaike '5?0 in"ormation criterion AIC0 to detect the $est order. The purpose to

use the in"ormation criteria is due to the common competing "actors in ;A< model%

#hich is that although adding more lags #ill reduce the

9here gkvi" is the :arman74lass volatility o" the data "rom CSI !! index "uture%

gkvhsi is the :arman74lass volatility o" the data "rom Hang Seng index "uture%

li"vol is the logged "orm o" the trading volume o" CSI !! index "uture%

li"oi is the logged "orm o" the open interest o" CSI !! index "uture%

lhsivol is the logged "orm o" the trading volume o" Hang Seng index "uture%

lhsioi is the logged "orm o" the open interest o" Hang Seng index "uture.

Impose response "unction is generated "rom the original ;A< model. The $i7

directional causality $et#een the t#o markets as the impact $rought $y the li-uidity

and market depth #ould $e studied through the statistic result generated "rom the

impose response "unction.

u#ented .4CH %odel

S##etric .4CH #odel

The :enerali)ed Autoregressive Conditional Heteroskedasticity :A


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To $e mentioned% the volatility here is di""erent the one in the "ormer steps. The

volatility generated $y :A


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Covariance between t"e intrada volatilit

The covariance $et#een the intraday volatility $et#een the index "uture and

underlying market a$out the t#o markets are presented in ta$le 1>

Table 5

CSI 300 inde!

CSI 300 inde! future

Han Sen inde!

Han Sen inde! future

CSI 300 inde!

'.!!!!


!.5'&'

'.!!!!

Han Sen inde!

!.5,?

!.&5

'.!!!!

Han Sen inde! future

!.&5

!.!,*

!.5?51


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'.!!!!

As sho#ed in the ta$le 1% the covariance $et#een the intraday volatility o" CSI !!

index and CSI !! index "uture is !.5'&' compared #ith !.5?51 o" the market in

Hong 4ong. The smaller num$er indicates that the daily movement o" CSI !! index

"uture does not match the underlying asset -uite #ell compared #ith Hong 4ong3s

market. Such result re"lects that compared #ith developed index "uture market% the

ar$itraging activity is still under development and an a$normal return can $e got

through ar$itraging during the sample period in China3s index "uture market. There

is no signi"icant correlation $et#een the daily movements o" the t#o markets. The

covariance $et#een the intraday volatility o" CSI !! index and Hang Seng index is

only !.5,?% #hile the covariance $et#een the t#o index "utures3 intraday volatilities

is even smaller. Such result is mostly due to the data collected. Although samecomponent companies are existed in $oth indices% the opening price o" Hang Seng

index is highly a""ected $y the per"ormance o" S stock market in the "ormer trading

day #hile china3s stock market does not. H#ang% &!'&0 Such result demonstrates

that "or hedgers% the Hang Seng index "uture has $etter hedging po#er than the CSI

!! index. The relatively lo# covariance o" CSI !! index "uture suggests that the

hedgers in China3s stock market should leave more margins in order to a$sor$ the

unexpected $ook loses #hen the index "uture does not match the underlying #ell.

+4 %odel

Interrelations"ip between volatilit6 openinterest and volu#e

sing AIC% the optimal lag is suggested to $e 1 in the model "or CSI !! index "uture

and "or Hang Seng index "uture. /y this #ay% ;A


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+ariable e!plained8 lifvol

+ariable e!plained8 lifoi

All

Ex7li"vol'

Ex7li"oi

All

Ex7gkvi"

Ex7li"oi

All

Ex7gkvi"

Ex7li"vol

CSI !! index "uture

'.5!1?'

'.1*

.1&5

&'.*,,LLL

'!.&LL

,.?&,5LL

&*.??1LLL

'5.'*LLL

'!.'5?LL

Table 9


22/42

Contract tpe

+ariable e!plained8 'v"si

+ariable e!plained8 l"sivol

+ariable e!plained8 l"sioi

All

Ex7lhsivol'

Ex7lhsioi

All

Ex7gkvhsi

Ex7lhsioi

All

Ex7gkvhsi

Ex7lhsivol

HSI "uture

'.&&&'LL

'.'?LLL

?.*&*,L

''.5L

.,,'!*

'!.&!1LL

&&.'!&LLL


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&.55,

&'.1,&LLL

For ta$le * and ta$le ?>

L'. Exclude is used as 3Ex3 "or short.

&. The value stated in the value is the chi7s-uare statistic

. Superscript LLL% LL% L% represent '+% 1+% '!+ signi"icance level.

The result sho#s that in CSI !! index "uture market% the intraday volatility and

open interest have a $i7directional relationship #ith the current trading volume.Ho#ever% in Hong 4ong3s market% such relationship is no# as signi"icant. 9hen

taken the intraday volatility out o" the model% the relationship $ecomes invalid. For

the intraday volatility% the result get "rom data o" Hang Seng index "uture sho#s that

the intraday volatility in the market is granger caused $y the log "orm o" volume and

open interest at 1+ signi"icant level. 9hile no exact relationship is "ound in the CSI

!! index "uture market $y any extent #hen using the intraday volatility as

dependent varia$le. Turning to open interest% $oth markets re"lect the "act that the

open interest is granger caused $y the intraday volatility and trading volume in the

past "e# days.

Such result can $e interpreted as that in "uture market% the open interest is the sign

o" the level o" the disagreement $et#een long and short and the level o" the

participants3 enthusiasm. For example% the high intraday volatility and trading

volume is al#ays a sign o" herding $ehaviour. The open interest sho#s the

participants3 outlook to#ards the market a"ter a #hole day3s movement. High

volatility and volume #ill make some traders #ant to "ollo# the trend #hile some

others #ant take pro"it "rom the call7$ack. The result get here sho#s that the herding $ehaviour is commonly existed in $oth markets. In most cases% the intraday volatility

should $e related #ith the volume and open interest in the past "e# days since the

open interest is the "uel "or the later volatility. Such relationship is sho#ed to $e

signi"icant in Hang 4ong. Ho#ever% no signi"icant relationship is "ound in CSI !!

"uture market. This should $e partly due to the "act that the CSI !! index "uture is

still under its gro#ing stage during the last year #hich can $e (udged $y the resistant

gro#th in open interest. Such phenomenon t#ists the theoretical relationship. In

$oth markets% volume is sho#ed to $e granger caused $y the past open interest andintraday volatility. Ho#ever% "or the Hang Seng index "uture% the relationship is


24/42

mainly caused $y the intraday volatility. As sho#ed in the ta$le ?% a"ter excluding the

intraday volatility% the causality $ecomes insigni"icant.

T"e bidirectional causalit between CSI 300

inde! future and Han Sen inde! future #ar'et

Another ;A< model is $uilt to study the $idirectional causality $et#een the

volatilities o" the t#o markets. As stated in the section o" methods and methodology.

The model is constructed as>

'0

&0

Follo#ing the procedure used in the "ormer section% the optimal lag is "irst to $e

selected using AIC. The result indicates that the optimal lag is ' kJ'0 in this case.

The result "rom :ranger causality test is sho#ed in ta$le ,% #hich indicates that the

intraday volatility o" Hang Seng index "uture is granger caused $y the intraday

volatility o" the intraday volatility o" CSI !! index "uture #hen taking the trading

volume and open interest as exogenous varia$les. The critical value doesn3t suggest

the existence o" the reverse relationship.

Table :

;uation

order

,rob - c"i(*)

'v"si

'

!.!!!LLL

'vif

'

!.&?'


25/42


The coe""icients and test statistics get "rom the ;A< model are stated in ta$le 5

$elo#>

Table <

Dependent variable

Independent variable

coefficient

, value

'v"si

gkvhsi7'0

!.!!'

!.*',

gkvi"7'0

!.&?*!

!.!!!LLL

li"vol

!.!!!'

!.''

lhsivol

!.!!!&

!.!!!LLL

li"oi


26/42

!.!!!'

!.'5&

lhsioi

!.!!!

!.!!LLL

constant

!.!!'

!.'?

'vif

gkvi"7'0

7!.!1!,

!.&?'

gkvhsi7'0

!.!&5

!.*'?

li"vol

!.!!!&

!.!!!LLL

lhsivol

!.!!!&

!.!!!LLL

li"oi


27/42

7!.!!!'

!.!!LLL

lhsioi

7!.!!!1

!.!!!LLL

constant

!.!!&!

!.!!,LLL


Budged $y the critical value% the coe""icients on the lagged intraday volatility in CSI

!! index "uture market and the log "orm o" the trading volume and open interest in

the Hang Seng index "uture market are signi"icant. The intraday volatility o" the CSI

!! index "uture in the "ormer day has a signi"icant in"luence to the current day3s

volatility in Hong 4ong3s market. It3s a direct sign that the Chinese stock market can $ring signi"icant in"luence to the Hong 4ong3s market in recent years. Commonly%

the trading volume and open interest #ould have direct relationship #ith current

day3s volatility. It3s $ecause o" the reason that the trading volume is the most direct

"orce that can induce volatility% #hile high volatility #ill cause the herding e""ect

#hich #ill make more traders #ant hold their positions overnight. The small values

o" the coe""icients are due to the di""erence in order o" the data. Although the

causality "rom the intraday volatility o" Hong 4ong3s market to Chinese market is not

signi"icant% all the critical values on the coe""icients o" the exogenous varia$les are

signi"icant. It should $e noticed that the trading volume and open interest o" Hong

4ong3s index "uture market has signi"icant impact on the current day3s volatility o"

CSI !! index "uture. This also indicates the strong correlations $et#een the t#o

markets in the current year.

Impose response "unctions are generated on the original model in order to get the

general path. The time span is set to $e '! #hich is the num$er o" trading days in t#o

#eeks. The path is sho#ed in "igure & and the numerical results are stated in ta$le '!.

Table 10


28/42

step

gkvhsi on gkvhsi

gkvhsi on gkvi"

gkvi" on gkvhsi

gkvi" on gkvi"

I


29/42

.!!!'&

.!!!!?5

7.!!!'

.!!!'&

1

.!!!!&*

7.5e7!*

.!!!!&'

.!!!!&*

*

7.e7!?

7'.e7!*

?.?e7!*

7.'e7!?

?

7.!e7!?

7&.*e7!,

'.e7!?

7.!e7!?

,

7'.5e7!,

&.!e7!,


30/42

7'.'e7!?

7'.5e7!,

5

.,e7!5

'.*e7!5

7,.e7!5

.,e7!5

'!

1.?e7'!

7&.!e7'!

'.'e7!5

1.?e7'!

From ta$le '!% the results suggest that among all the "our paths% a unit shock #ill die

out -uickly in the "ollo#ing trading days. A"ter one trading #eek% the impact #ould

$e tiny. The most signi"icant e""ect comes "rom the intraday volatility o" CSI !!

index "uture to Hang Seng index "uture. In the next trading day% nearly &?+ o" the

shock is remained. Such impact #ould $e drop sharply in later periods and $ecame

negative "or t#o days a"ter going through the second period. The shock in the

intraday volatility o" Hang Seng index "uture #ill $ring impact to the CSI !! index

"uture in the reverse direction. /ut the impact is not signi"icant. /oth markets candigest the shock "rom their o#n -uickly. The result sho#s that nearly 55+ o" the

shock #ill die out in the next period. And the over shoot happened in the second and

third steps.

.4CH %odel

:A


31/42

predicta$ility. As stated in the section o" methods and methodology% the 9ald test is

generated to detect the most appropriate "orm. In this study% di""erent "orms o"

A


32/42

A


33/42

8A

!.1*5


From ta$le ''% the p value got "rom 9ald test suggests that "or $oth market% the

A

Table 1*

Contract tpe

+olu#e

2pen interest

!pected

=ne!pected

!pected

=ne!pected


34/42


7'.??

7'.&**LLL

7!.?1'

7'1.!'LLL

Han Sen Inde! future

7?.5?!LLL

7'1.&1LLL

7*.&'5LLL

7'.1,!LLL

As sho#ed in the section o" data and descriptive statistics% the open interest o" the

CSI !! index "uture is not appeared to $e stationary% the predicted "orm sho#s the

same property. It3s also "ound that #hen trans"ormed into predicted "orm% the unitroot pro$lem also exists in the volume data "rom CSI !! index "uture. Since "or the

exogenous varia$les must meet the condition o" stationary% these t#o varia$les

cannot $e put into the conditional variance e-uation in the later stage. /ecause this

study is aimed at investigating the relationships and making comparisons $et#een

the index "uture markets in China #ith the same market in Hong 4ong% the varia$les

#ith the same de"initions "rom Hang Seng index "uture are dropped "rom the

condition covariance e-uation in the same #ay in order to make comparisons. In this

case% the :A

For CSI !!index "uture%

The similar model is used to process the data o" Hang Seng index "uture.

The regression results are stated in ta$le '>

Table 13

CSI 300 inde!


35/42

Han Sen Inde!

sti#ators

sti#ation

, value

sti#ation

, value

!.!!'1LL

!.!

7!.!!''

!.',

7!.?&1

!.'*&

7!.,&5LL

!.!?

7!.!,,!L

!.!5'

7!.!,'

!.&5

7!.***'

!.'51

!.??'&L


36/42

!.!1&

7,.5&51LLL

!.!!!

7,.*1,LLL

!.!!!

7!.!*''LL

!.!'

!.!*&?

!.'11

!.!,55

!.*

7!.!**

!.*

!.!!!!'LLL

!.!!!

!.!!!!'LLL

!.!!

!.!!!!?L

!.'!!

.1*e7*

!.?&*

>ald test


37/42

!.&!,

!.''1*


The short7run dynamics o" the resulting volatility time series can $e (udged $y the

value o" the A

Table 1/

CSI 300 inde!


38/42

Han Sen Inde!

sti#ators

sti#ation

, value

sti#ation

, value

7!.!?,

!.*'&

!.,*LLL

!.!!!

!.!!!!?

!.'&,

!.!!!!'LLL

!.!!

!.!!!!'LLL

!.!!!

7!.!!!!LL

!.!,

>ald test

!.!15?L

!.!!!!LLL


39/42


/oth models are signi"icantly improved $y using E:A


40/42

structure o" open interest in Hong 4ong should $e a reason "or the unusual

relationship. Such result also indicates that traders do not need to use speci"ic

strategy to react to the unexpected open interest. The $igger a$solute value on the

unexpected open interest demonstrates that the unexpected change on open interest

$rings more in"ormation compared to unexpected change on trading volume. All o"

the parameter values got on unexpected terms is relatively small. This is due to the

di""erence in the numerical order among varia$les. The value o" trading volume and

open interest are signi"icantly larger than daily return% #hich is di""erent "rom the

market in China3s market. The result indicates that the unexpected change in trading

volume conveys more in"ormation and $rings larger e""ect to the market.

Conclusion

China launched the CSI !! index "uture in April% &!'!. Compared to the index

"uture in some developed markets% the Chinese index "uture is still immature $ut

gro#ing in a "ast pace during the last t#o years. The study examines the characters in

the volatility o" the CSI !! index "uture3s trading in the recent year. The Hang Seng

index "uture market is chose to $e the sample o" developed market. The trading

volatility o" Hang Seng index "uture during the same period is studied in the same

#ay in order to make comparisons. The study on volatility is mainly "ocused on the

interrelationships $et#een the volatility and the trading volume and open interest

since it3s #idely accepted that the latter t#o parameters can $e (udged as signs o" the

movement in volatility. There are mainly three types o" participants in the index

"uture market% #hich are ar$itrager% hedger and trader. The needs and concerns o"

di""erent groups o" participants are considered separately. Traders can $e "urther

separated into speculators and investors. Speculators care more a$out the intraday

volatility since the intraday volatility is #here the risk and volatility come "rom% #hile

the latter concerns more a$out the volatility $et#een a certain periods $ecause they

need to take the volatility into consideration to protect their margin.

The covariance $et#een the index "uture and underlying is studied $ased on the

point that "or hedgers% the matching e""iciency is their "irst consideration. The same

is "or ar$itragers6 the ar$itraging pro"it comes "rom the asymmetric movement

$et#een the index "uture and underlying index. The :arman74lass ;olatility is

instrumented as the measurement o" intraday volatility. The results sho#s that the

covariance o" the intraday volatilities $et#een CSI !! index "uture and its

underlying index is relatively small compared to the result got on Hang Seng index

"uture. It indicates that compared to the hedgers in Hong 4ong3s market% the hedgersin China should leave more margins in order to a$sor$ the unexpected $ook loses


41/42

#hen the index "uture does not match the underlying #ell. It also suggests that the

ar$itraging return on CSI !! index "uture is still relatively high compared to the

Hang Seng index "uture a"ter one year3s development.

T#o ;A< models are constructed in this study. A simple ;A< is "irst applied to study

the characters o" intraday volatility and the causality relationship #ith market depth

and li-uidity. The result get "rom data o" Hang Seng index "uture sho#s that the

intraday volatility in the market is granger caused $y the log "orm o" volume and

open interest at 1+ signi"icant level. 9hile no exact relationship is "ound in the CSI

!! index "uture market $y any extent #hen using the intraday volatility as

dependent varia$le. The result "rom Hang Seng index "uture is reasona$le since it

re"lects the herding $ehaviour #hich is commonly seen in "inancial markets.

Ho#ever% since a unit root pro$lem has $een detected in the open interest data o" CSI!! index "uture% it indicates that the "ast gro#ing pace o" this market t#ist such

relationship. The e""ect should $e temporary. Another ;A< model #ith logged "orm

o" trading volume and open interest as exogenous varia$les is used to study the $i7

directional causality $et#een intraday volatilities o" CSI !! index "uture market and

Hang Seng index "uture market. Impose response "unction is generated to get the

path o" the in"ormation "lo#. The intraday volatility o" the CSI !! index "uture in

the "ormer day has a signi"icant in"luence to the current day3s volatility in Hong

4ong3s market. It3s a direct sign that the Chinese stock market can $ring signi"icantin"luence to the Hong 4ong3s market in recent years. The shock in the intraday

volatility o" Hang Seng index "uture #ill $ring impact to the CSI !! index "uture in

the reverse direction. /ut the impact is not signi"icant. /oth markets can digest the

shock "rom their o#n -uickly. The overshot #ill come in the second period on $oth

paths.

:A


42/42

signi"icantly a""ect volatility. Ho#ever% only unexpected open interest can in"luence

the volatility o" CSI !! index "uture. The impacts $rought $y unexpected open

interest are in di""erent directions in the t#o markets. For CSI !! index "uture% the

unexpected open interest can positively a""ect the volatility #hile such impact is

negative in Hong 4ong. Such di""erence is due to the "act that as proved $y

H#ang&!'&0% the Chinese stock market is more independent compared #i

evidence from csi index future and hsi index finance essay

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