scholarly journals Does contract size matter for price discovery and risk management in stock index futures?

2016 ◽  
Vol 13 (3) ◽  
pp. 62-74
Author(s):  
Sangram Keshari Jena ◽  
Ashutosh Dash
Keyword(s):  
Risk Management ◽  
Price Discovery ◽  
Stock Index ◽  
Stock Index Futures ◽  
Lot Size ◽  
Open Interest ◽  
Index Futures ◽  
Futures Contract ◽  
Size Matter ◽  
The Impact

In an effort to increase the liquidity and accessibility to the investors, National Stock Exchange of India (NSE) had reduced contract size of its Nifty index futures two times from 200 to 100 and, subsequently, to 50 units. How does this change in contract size of index futures impact the informed and hedge based trading, thereby contributing to the twin objectives of price discovery and risk management, respectively? VAR model is applied to daily return volatility, volume and open interest to study the impact. Significant feedback relationship between volume and volatility following the reduction in contract size establishes the informational trading and price discovery. However, no causality from volatility to open interest implies contract size is not a determinant of hedging. But significant causality from open interest to volatility is establishing the non-informational and liquidity trading. So stock exchanges should consider the appropriate lot size before going for introducing new futures contract

scholarly journals The Impact of Restrictive Measures on the Price Discovery Function of Stock Index Futures – Evidence From CSI 500 Stock Index Futures

2018 ◽  
Vol 9 (4) ◽  
pp. 117
Author(s):  
Maoguo Wu ◽  
Zhehao Zhu
Keyword(s):  
Price Discovery ◽  
Spot Market ◽  
Stock Index ◽  
Stock Index Futures ◽  
Future Market ◽  
Index Futures ◽  
The Future ◽  
The Difference ◽  
Restrictive Measures ◽  
The Impact

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.

scholarly journals The Impact of Underlying Market Closure on Futures Market Liquidity: Evidence from China

2012 ◽  
Author(s):  
Wang Chun Wei ◽  
Alex Frino
Keyword(s):  
Futures Market ◽  
Market Liquidity ◽  
Stock Index ◽  
Stock Index Futures ◽  
Contagion Effect ◽  
Index Futures ◽  
Empirical Results ◽  
Open Session ◽  
The Impact ◽  
Closure Theory

This study investigates the trading activity of Chinese stock index futures, recently introduced at the open and close of the underlying trading. We document the impact of the underlying spot on the futures market liquidity as well as volatility as discussed in earlier works on market closure theory. Our empirical results support previous literature on the impact of the underlying, particularly during the open session, as a contagion effect, which is clearly at play. We find significant U-shaped patterns in liquidity factors and intraday volatility during open and close trades in the morning.  

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