Does Index Futures Trading Reduce Volatility in the Chinese Stock Market? A Panel Data Evaluation Approach
Haiqiang Chen, Qian Han, Yingxing Li, Kai Wu
Journal of Future Markets
#002169 20131014 (published)
This paper 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 et al. 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.
JEL-Codes: G14; G1; G15.
Keywords: Index futures; Spot market volatility; Panel data; Chinese stock market.

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