Does Index Futures Trading Reduce Volatility in the Chinese Stock Market? A Panel Data Evaluation Approach

This study investigates the effect of introducing index futures trading on the spot price volatility in the Chinese stock market. We employ a recently developed panel data policy evaluation approach (Hsiao, Ching, and Wan, 2011) to construct counterfactuals of the spot market volatility, based mainl...

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Bibliographic Details
Published in:The journal of futures markets 2013-12, Vol.33 (12), p.1167-1190
Main Authors: Chen, Haiqiang, Han, Qian, Li, Yingxing, Wu, Kai
Format: Article
Language:English
Subjects:
China
Correlation
Correlation analysis
Futures
Futures trading
Regression analysis
Securities markets
Stock exchange
Stock exchanges
Stock prices
Studies
Time series
Volatility
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Summary:This study investigates the effect of introducing index futures trading on the spot price volatility in the Chinese stock market. We employ a recently developed panel data policy evaluation approach (Hsiao, Ching, and Wan, 2011) to construct counterfactuals of the spot market volatility, based mainly on cross‐sectional correlations between the Chinese and international stock markets. This new method does not need to specify a particular regression or a time‐series model for the volatility process around the introduction date of index futures trading, and thus avoids the potential omitted variable bias caused by uncontrolled market factors in the existing literature. Our results provide empirical evidence that the introduction of index futures trading significantly reduces the volatility of the Chinese stock market, which is robust to different model selection criteria and various prediction approaches. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:1167–1190, 2013
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.21573