Restrictive measures implemented by governments have a great impact on the price discovery function of stock index futures. This study compares the price discovery function of CSI 500 stock index futures and CSI 500 stock index before and after the implementation of restrictive measures based on the reaction speed to new information, the price ratio of new information and the price contribution of both future market and spot market. It also analyzes the difference between the price discovery function of the future market and that of the spot market and thus proposes policy implications accordingly.Utilizing data of CSI 500 stock index futures in the period of the stock market crash, this study compares the price discovery function before and after the implementation of restrictive measures. By means of the VECM model and common factor analysis, it further investigates the difference in the price contribution of the two markets. Contributing to existing literature on the relationship between the future market and the spot market, this study explores the change in the price contribution of the two markets and therein studies the impact of restrictive measures on the price discovery function. Empirical evidence finds that before the implementation of restrictive measures, the price discovery function worked more efficiently, while, however, after the implementation of restrictive measures, the price discovery function did not work. Hence, stock index futures do assist in the price discovery of the spot market. In some special time periods, however, due to the impact of restrictive policies, the price contribution of the spot market exceeded that of the future market, implying that the price discovery function of the CSI 500 stock index future market is unstable.
The Impact of Underlying Market Closure on Futures Market Liquidity: Evidence from China
