The Efficiency Research on Stock Index Derivatives in a Bear Market—The Evidences from Hangseng Index Derivatives Markets

Jie Wei

doi:10.4236/ti.2013.42012

Abstract

This paper examines the relationships among Hangseng index and its related derivatives in a bear market. The Johansen Co-integration and vector error correction model are used to analyze the relationships between markets. The main results are as follows: 1) The lead-lag relationships show that Hangseng index futures and option markets play a more important price discovery role; 2) The pricing efficiency test demonstrates that both Hangseng index futures and options markets are all efficient; 3) It proves that the existence of Hangseng index option market has a huge promotion effect to Hangseng cash and futures markets and increases their liquidity. This conclusion gives evidence thatChinashould launch the stock index options with the same underlying index in due time and form a pattern that stock index futures and option markets develop in parallel.

Highlights

With the launch of Shanghai-Shenzhen 300 index option soon becoming a reality in China, some issues such as how to put its hedging function into full play, how to establish an efficient option market and how to judge the effectiveness of stock index derivative markets seem extremely urgent
The main results are as follows: 1) The lead-lag relationships show that Hangseng index futures and option markets play a more important price discovery role; 2) The pricing efficiency test demonstrates that both Hangseng index futures and options markets are all efficient; 3) It proves that the existence of Hangseng index option market has a huge promotion effect to Hangseng cash and futures markets and increases their liquidity
This conclusion gives evidence that China should launch the stock index options with the same underlying index in due time and form a pattern that stock index futures and option markets develop in parallel

Summary

Introduction

With the launch of Shanghai-Shenzhen 300 index option soon becoming a reality in China, some issues such as how to put its hedging function into full play, how to establish an efficient option market and how to judge the effectiveness of stock index derivative markets seem extremely urgent. It is expected that returns in index futures lead returns in the underlying cash index, and numerous studies have provided supporting evidence on the conjecture, such as Grabade and Silber (1983) [5], Kawaller, Koch and Koch (1987), Herbst, McCormack and West (1987) [6], Stoll and Whaley (1990) [7], Schroeder and Goodwin (1991) [8], Chan (1992) [9]. These studies are based on the intraday price relationship between the stock index and its futures and use different time-intervals. Stephan and Whaley (1990) [13] report that price changes in the stock market lead

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