Are Tightened Trading Rules Always Bad? Evidence from the Chinese Index Futures Market

Abstract

This paper investigates the impact of tightened trading rules on the market efficiency and the price discovery function of Chinese stock index futures in 2015. In contrast with severe criticism of these changes, we fail to find empirical evidence that market efficiency and price discovery deteriorated after these rule changes. Using variance ratio and spectral shape tests, we find that the Chinese index futures market became even more efficient after the tightened rules came into effect. Furthermore, by employing Schwarz and Szakmary (1994) and Hasbrouck (1995) price discovery measures, we find that the price discovery function, to some extent, became better. This is consistent with Stein (2009), who finds that regulations on leverage can be helpful in a bad market state, and Zhu (2014), who finds that price discovery can be improved with reduced liquidity. It also suggests that the new rules may effectively regulate the manipulation behaviour of the Chinese stock index futures market, and then positively affect its market efficiency and price discovery function.