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Do loosened trading rules restore the stock index futures price discovery ability in China?

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Listed:
  • Zhang, Xiaotao
  • Zhao, Yuepeng
  • Wang, Ziqiao

Abstract

In response to the severe liquidity depletion caused by extremely stringent trading restrictions, which were initially designed to deter speculative activities, China's regulatory authorities progressively loosened the trading rules governing the stock index futures market from 2017 to 2019. This paper explores the evolution of price discovery and volatility spillover between the index futures and its spot market amidst the four-phased loosening of trading rules. Utilizing a high-frequency dataset (5-min intervals), our findings unearth that the initial restrictive regulatory framework notably hinders the index futures market's functions of price discovery and volatility spillover. These functions then begin to exhibit signs of recovery as the restrictions are incrementally loosened. However, our analysis also uncovers that an excessive loosening of trading rules conversely impairs these critical market functions. The findings underscore the necessity for regulatory bodies to develop adaptable and reactive regulatory frameworks that can align with the market's continuous evolution.

Suggested Citation

  • Zhang, Xiaotao & Zhao, Yuepeng & Wang, Ziqiao, 2024. "Do loosened trading rules restore the stock index futures price discovery ability in China?," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 389-397.
    • Handle: RePEc:eee:reveco:v:93:y:2024:i:pb:p:389-397
    DOI: 10.1016/j.iref.2024.05.010
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    More about this item

    Keywords

    Stock index futures market; Loosened trading rules; Price discovery; Volatility spillover;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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