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China Finance Review International
The spillover effect between CSI 500 index futures market and the spot market:
Evidence from high-frequency data in 2015
Xuejun Fan, De Du,
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Issue: 2, pp.249-272, doi: 10.1108/CFRI-08-2016-0103
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The spillover
The spillover effect between CSI effect
500 index futures market and the
spot market
Evidence from high-frequency data in 2015 249
Xuejun Fan and De Du Received 24 August 2016

Revised 24 November 2016
East China Normal University, Shanghai, China Accepted 28 November 2016
Abstract
Purpose – Focusing on the spillover effects between the CSI 500 stock index futures market and its
underlying spot market during April to September 2015, the purpose of this paper is to explore whether
Chinese stock index futures should be responsible for the 2015 stock market crash.
Design/methodology/approach – Using both linear and non-linear econometric models, this paper
empirically examines the mean spillover and the volatility spillover between the CSI 500 stock index futures
market and the underlying spot market.
Findings – The results showed the following: the CSI 500 stock index futures market has significant one-way
mean spillover effect on its spot market. The volatility in CSI 500 stock index futures market also has a
significant positive spillover effect on its spot stock market, and the mean value of dynamic correlation
coefficient between the two market volatility is 0.4848. The spillover effect of the CSI 500 stock index futures
market on the underlying spot market is significantly asymmetric, characterized by relatively moderate and
slow during the period of the markets rising, yet violent and rapid during the period of the markets falling.
The findings suggest that although the stock index futures itself was not the “culprit” of Chinese stock
market crash in 2015, its existence indeed accelerated and exacerbated the stock market’s decline under the
imperfect trading system.
Originality/value – Different from the existing literature mainly focusing on CSI 300 stock index futures,
this paper empirically examines the impact of the introduction of CSI 500 stock index futures on 2015 Chinese
stock market crash for the first time.
Keywords Asymmetry, CSI 500 stock index futures, Leading role, Spillover effect
Paper type Research paper
1. Introduction
Stock index futures refers to the standard futures contract taking stock price index as
subject. The first stock index futures contract in the world began trading on February 24,
1982, in the USA by the Kansas City Board of Trade. In China, the country’s first stock index
futures contract, namely, CSI 300 stock index futures, was launched by the Shanghai-based
China Financial Futures Exchange (CFFE) on April 16, 2010, and then CSI 500 stock index
futures and SSE 50 stock index futures were formally listed on April 16, 2015.
The stock market crash during June-July 2015 in China pushed stock index futures at the
cusp of public opinion, and discussions on whether stock index future is the “crime culprit”
of 2015 stock market crash rise one after another. Liu Shuwei points out that stock index
futures and other leverage are the tools of shorting Chinese stock market, and the “killer of
bull market”[1]. However, Ba Shusong holds that stock index futures is an important part of
the financial market, and it is unrealistic to manipulate the stock market through stock
index futures[2]. Under the pressure of public opinion, the CFFE, on September 2, 2015,
issued an announcement, according to which strict restriction should be implemented
against stock index futures trading since September 7; the customer whose daily opening China Finance Review
International
trading volume of a single product exceeding 10 hands would be deemed as abnormal Vol. 7 No. 2, 2017
pp. 249-272
© Emerald Publishing Limited
2044-1398
JEL Classification — G14, G18 DOI 10.1108/CFRI-08-2016-0103
CFRI trading behaviors of “too large daily opening trading volume” except for hedging trading,
7,2 and the margin standards and trading fee should be substantially increased.
This paper takes CSI 500 stock index futures as the study object and explores whether
Chinese stock index futures should be responsible for 2015 Chinese stock market crash.
Specifically, it solves the following problems: Are there significant spillover effects between
CSI 500 stock index futures and the underlying spot market, including mean spillover effect
250 and volatility spillover effect? How about the lead-lag relation between prices of the two
markets? Are the spillover effects between CSI 500 index futures market and the underlying
spot market significant asymmetry? What is the role of stock index futures in China A-share
market crash during June-July 2015?
The contributions of this paper are mainly in the following three aspects. First, different
from the existing literature mainly focusing on CSI 300 stock index futures, this paper takes
CSI 500 stock index futures during the special market period from April 2015 to September
2015 as the object of study, which can be more conducive to reveal the role of stock index
futures in 2015 stock market crash. The reasons mainly include the following: the CSI 500
index constituent stocks cover the most representative categories small cap stocks, which
are most active since July 2014 and whose investors suffer the largest losses in the stock
market decline; the basis of CSI 500 stock index futures, especially discount rate, is larger
than CSI 300 stock index futures and SSE 50 stock index futures in the same period, and it is
difficult for CSI 500 stock index futures to realize reverse arbitrage by limited short tool, for
which it suffers more disputes in the market slump in June-July 2015; and CSI 500 stock
index futures contract was formally listed for trading on April 16, 2015, and compared with
the relatively matured CSI 300 stock index futures, the newly launched stock index futures
may play a more obvious role in the 2015 stock market slump. Furthermore, compared with
SSE 50 stock index futures listed at the same period, CSI 500 stock index futures samples
cover much wider scope of constituent shares, and the research results will be more general
and representative.
Second, the investigation of spillover effect in this paper is mainly carried out at
two levels, namely, mean spillover and volatility spillover. The mean spillover test is the
first-order moment test of the price, and the volatility spillover test is the second-order
moment test of the price. Therefore, the research results will be more complete, and the
conclusions will be more reliable.
Finally, compared with the former literature taking GARCH models to study
the asymmetry of volatility spillover only, this paper will also apply MS-VAR model to
examine the asymmetry of mean spillover effect. Upon verification by this paper, MS-VAR
model can match the relationship between CSI 500 stock index futures market and the
underlying spot market in a better manner, and it produces more accurate conclusions.
The rest of the paper proceeds as follows: Section 2 offers a brief literature review;
Section 3 describes the data, sample, and methodology; Section 4 explores the spillover
effect between CSI 500 stock index futures market and the underlying spot stock; Section 5
examines the asymmetry of spillover effect between the two markets; and Section 6 provides
summary and conclusion.
2. Literature review
As a tool for financial risk management, stock index futures are always controversial.
In academic circles, it has been widely recognized that there are some links in price
volatility between stock index futures market and its spot market due to the existence of
arbitrage mechanism. However, the directions and the degrees of the influence are still
bearing many disputes.
On the one hand, it is argued that futures trading are beneficial to market maturity as it
can accelerate price discovery, improve market efficiency, increase market depth as well as
information flows and promote information flow. Therefore, the introduction of futures The spillover
trading can reduce the volatility of the spot market (Powers, 1970; Danthine, 1978; effect
Bray, 1981; Kyle, 1985; Stoll and Whaley, 1988). On the other hand, futures trading may
increase the volatility of the underlying spot market due to the impact of uninformed
investors, thus further damage the stability of spot market. Being attracted by relatively low
transaction costs, high degrees of leverage, and the ability to sell short, badly informed
investors may induce noise in the price discovery process and lower the information content 251
of prices. This implies an increase in spot market volatility (Cagan, 1981; Stein, 1987).
According to Hart and Kreps (1986), speculative activity is likely to destabilize the price
stability, no matter whether those investors have obtained sufficient information or not.
It is the theoretical disputes that prompt a number of empirical investigations with
conflicting evidence, and three major conclusions have been reached so far, namely, the
introduction of stock index futures reduce, increase, or has no effect on the volatility of the
underlying spot market.

Edwards (1988) and Bessembinder and Seguin (1993) present empirical evidence that
the volatility of spot market is reduced after the introduction of S&P 500 stock index
futures, and then conclude that stock index futures may stabilize the volatility of spot
market. Bacha and Vila (1994), Hirakia (1995), Reyes (1996), Dennis and Sim (1999), and
Alexakasis (2007) report that the stability hypothesis of stock index futures has been
verified in the stock markets of Japan, France, Denmark, Australia, and Greece. Focusing
on the Turkish market, Baklaci and Tutek (2006), Kasman and Kasman (2008), and
Caglayan (2011) find that the introduction of stock index futures lowers the sustainability
and volatility of spot market information. Bohl et al. (2015) take the Chinese Mainland,
Singapore and Hong Kong as study objects to examine whether the introduction of
Chinese stock index futures had an impact on the volatility of the underlying spot market,
and results indicate that Chinese index futures decrease spot market volatility in all three
spot markets considered.
In contrast, Harris(1989), Maberly, et al. (1989), Lockwood and Linn (1990), Baldauf and
Santoni (1991), Brorsen (1991), and Pericli and Koutmos (1997) all find that the introduction
of the S&P 500 futures contract results in significant increase in stock index returns
volatility. Antoniou and Holmes (1995), Chiang and Wang (2002), and Ryoo and Smith
(2004), respectively, examine the influence of stock index futures trading in Britain, Taiwan,
and South Korea on the volatility of spot market, and find increasing spot market volatilities
after the introduction of stock index futures. Arisoy (2008) examines the introduction of the
SGX FTSE Xinhua China A50 index futures contract on the volatility and liquidity of its
underlying spot market. The findings indicate a significant increase in spot volatility and
liquidity in the post-futures period. Wang (2009), based on the empirical evidence from
H stock index futures, finds that the introduction of stock index futures leads to speculative
overheating phenomenon and further aggravates the volatility of spot market.
In addition, some research studies finds no significant impact of the introduction of
futures markets on the volatility of the underlying at all, or the direction of the impact is
uncertain (Board et al., 2001; Santoni, 1987; Pericli and Koutmos, 1997; Darrat et al., 2002;
Spyrou, 2005; Bohl et al., 2011; Xie and Huang, 2014; Bohl et al., 2016). Besides, there are
some empirical studies taking multiple countries as objects of study, such as performed by
Lee and Ohk (1992), Gulen and Mayhew (2000), Yu (2001), Antoniou et al. (2005), and Chen
(2014); the result indicates that the influence of stock index futures on the volatility of spot
market varies in different countries and at different times.
Furthermore, other studies focus on the role of stock index futures in the US stock
market crash in 1987. According to the Brady Report (1988), the use of the various strategies
involving “program trading” (i.e. index arbitrage, index substitution, and portfolio
insurance) is a significant factor in accelerating and exacerbating the declines. Becketti and
CFRI Roberts (1990) find that stock index futures did not enlarge market volatility in 1987 stock
7,2 market crash, and a series of measures taken subsequently, such as higher margins and
“circuit breakers,” were unlikely to reduce stock market volatility.
Antoniou and Garrett (1993) find that futures market indeed aggravated the downward
movement of price, while the root lies in the stock market, particularly dry liquidity.
In China, the early researches gave priority to the impact of stock index futures trading
252 on the volatility of spot market in developed markets such as America, Britain, and
Hong Kong. After China launched the mock trading of CSI 300 stock index futures in
October 2006, the emphasis of research has been transferred to Chinese stock market, the
price discovery function of stock index futures as well as the influence on the volatility of
stock spot market have been examined, and the conclusions are diversified.
Based on the daily data of CSI 300 stock index futures emulation trading, Yan et al. (2009)
report that the spot market is mainly responsible for the price discovery, and the
bi-directional volatility spillover effect is moderate. Xing and Zhang (2010) also conclude
that the impact of CSI 300 stock index futures on the volatility of the underlying spot market
is moderate, and only exerts certain driving effect in the short run, but amplifies asymmetry
of spot market. Hua and Liu (2010) using one-minute high-frequency data of CSI 300 stock
index futures and CSI 300 index between April 16, 2010 to June 11, 2010, find that there is a
bi-directional lead-lag relationships between CSI 300 stock index futures and the CSI 300
index spot; the CSI 300 stock index futures market bears longer leading time, longer lasting
influence, and larger scope impact than the underlying spot market, serving as the major
driving force of price discovery. Yang and Wan (2010) hold that stock index futures market
with imperfect structure and more speculation will substantially enlarge the volatility of
stock market, while the stabilizing effect of stock index futures is gradually obvious along
with the perfection of market structure. Luo and Wang (2011) point out that, at the
beginning of the launch of stock index futures, stock index futures accelerated the volatility
of the whole spot market and weakened the liquidity of spot market. As time goes on, stock
index futures lower the volatility and enhance its liquidity of constituent stock’s spot
market. Zhang and Shen (2011) also find that the introduction of CSI 300 stock index futures
enlarges the volatility of the spot market in the medium and long term, while such influence
is gradually reduced over time. Fang and Cai (2012) conclude that CSI 300 stock index
futures and the spot stock take on a coordinated movement as a whole; however, CSI 300
futures do not have stable leading function for the spot stock in the long term. Li et al. (2012)
find that, upon the launch of CSI 300 stock index futures, the inner-day five-minute volatility
of CSI 300 Index declined by 37 percent and the daily logarithm trading volume volatility of
CSI 300 index constituent stock decreased by 40 percent. Tao et al. (2014) report that the
price discovery of stock index futures witnesses remarkable improvement when the stock
index futures market is more active than the spot market and the market volatility declines.
With regard to the role stock index futures played in the 2015 stock market crash, National
Institute of Financial Research of Tsinghua University (2015) published a research report
titled as “Perfect system design and improve market confidence – establish long-term, healthy
and stable development capital market,” according to which stock index futures are not the
killer for the stock market crash. However, more in-depth and persuasive empirical research is
desperately needed.
3. Sample, data, and methodology

Compiled and published by the China Securities Index Company, CSI 500 stock index
futures refer to the stock index futures taking CSI Small cap 500 index as its underlying
asset, which consists of 500 small-capitalization and actively traded stocks listed in
Shanghai and Shenzhen stock markets. The contract multiplier is $200 per point,
the minimum margin ratio is 8 percent, and the leverage ratio is 1:12.5.
3.1 Sample selection and description The spillover
We select the five-minute time-series data of CSI 500 stock index futures (month continuous effect
contract of IC[3]) and CSI 500 stock index from 9:35 of April 16, 2015 to 15:00 of September 1,
2015, totally 4,608 observation points as our samples.
CSI 500 stock index futures was formally listed for trading on April 16, 2015, while
September 2, 2015 is the day when CFFE began to restrict the daily opening number of
stock index futures within ten hands, after that the trading volume of stock index futures 253
shrunk dramatically, and the representativeness and guiding meaning of price were greatly
weakened. Therefore, taking the performance of CSI 500 stock index futures market and the
underlying spot market during this period as the study objects can help us to completely
observe the whole skyrocketing and crash process of Chinese stock market experienced in
2015, and discover the role of stock index futures in the stock market crash. In addition, the
reason of selecting five-minute high-frequency data lies in that, first, it can avoid the
estimation deviation caused by few samples, and second, it is the highest frequency data
that can be free from microstructure noise (Andersen et al., 2001).

As the trading hour of stock index futures market in China starts 15 minutes earlier and
ends 15 minutes later than that of the spot market, and it is difficult to model for unbalanced
data, so we adopt the conventional data processing method to take spot stock trading data
as basis, and apply the overlapped trading hour of stock index futures and stock index spot
for research.
In this paper, the mean spillover effect is tested by using price time-series data, and the
volatility spillover effect is tested by using return time-series data. The two types of data
come from WIND financial terminal.
3.1.1 Sample of price series. The statistical results of five-minute time-series data of CSI
500 stock index futures and CSI 500 stock index from 9:35 of April 16, 2015 to 15:00 of
September 1, 2015 are shown in Table I.
From Table I, it can be observed that the mean value of CSI 500 stock index futures
(hereinafter referred to as “IC”) is close to that of CSI 500 stock index (hereinafter referred to
as “CSI 500”); the difference is only 100 points approximately. On the whole, since April 16,
2015, Chinese A-share market has experienced extreme conditions of bubble and crash
taking June 15 as the line of demarcation, which is reflected on the extreme value, where the
five-minute minimum of CSI 500 is 6,134 points and the maximum is 11,616.29 points with a
difference up to 5,482.29 points, while the five-minute minimum of IC is 5,370.6 points and
the maximum is 11,556.8 with a larger difference up to 6,186.2 points. Observing from the
standard deviation, the mean value of price deviation of IC is larger.
3.1.2 Sample of return series. According to the conventional methods of the mature
researches, we adopt return as the index of price to test volatility spillover effect.
The following equation is the formula of return:
Rt ¼ lnðP t Þ lnðP t1 Þ (1)
where R is the return rate, P is the price, and subscript t is the time.
The statistical results of five-minute return time-series data are described in Table II.
It can be observed that the return mean value of CSI 500 stock index futures (hereinafter
referred to as “IC”) and CSI 500 stock index (hereinafter referred to as “CSI 500”) are close to 0;
Mean Median Max. Min. SD Skew. Kurt. Obs.

Table I.
PCSI 500 8,637.23 8,372.39 11,616.29 6,134.05 1,304.0180 0.5104 2.5607 4,608 Descriptive statistics
PIC 8,458.88 8,206.20 11,556.80 5,370.60 1,418.6590 0.3822 2.5721 4,608 of price series
CFRI the minimum five-minute return of CSI 500 stock index is −7.51 percent, and the maximum
7,2 five-minute return of CSI 500 stock index is 5.18 percent, while the extreme values of CSI 500
stock index futures are smaller than that of CSI 500 stock index.
The five-minute return series data of CSI 500 stock index and that of CSI 500 stock
index futures from 9:35 of April 16, 2015 to 15:00 of September 1, 2015 are described as
Figures 1 and 2.
254 From the return graphs, we can find that the return series witnesses obvious volatility
clustering. In the meantime, return series fluctuates around 0 with relatively stable mean value.
3.1.3 Data stationarity. In order to avoid the pseudo regression phenomenon in empirical
test, it is essential to carry out stationary test for the time series of the variables. In this
paper, we use ADF test to examine the unit roots of sample data, and the null hypothesis of
ADF test is that there is a unit root. The number of lags is automatically generated by
EVIEWS. Table III reports the results of unit root test.
According to the test results, IC and CSI 500 cannot reject the null hypothesis at the original
series level, which means that both the two price series have unit roots. Upon first-order
difference, both the two series reject the null hypothesis and show obvious stability, indicating
that the two price series are integrated of order 1. As the first-order difference of price series is
return series, the stability at the level of first-order difference also proves that both IC return
series and CSI 500 return series are stable.
Mean Median Max. Min. SD Skew. Kurt. Obs

Table II.
Descriptive statistics IC −0.0002 0.0000 0.0342 −0.0397 0.0059 −0.0959 8.1312 4,608
of return series CSI 500 −0.0001 0.0001 0.0518 −0.0751 0.0053 −1.2133 31.9344 4,608
0.06
0.04
0.02
0.00
–0.02
–0.04
–0.06
Figure 1.
CSI 500 return graph –0.08
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
0.04
0.03
0.02
0.01
0.00
–0.01
–0.02
–0.03
Figure 2. –0.04
IC return graph –0.05
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
3.2 Research design of spillover effect The spillover
We shall investigate spillover effect at two levels, namely, mean spillover effect and effect
volatility spillover effect. Mean spillover effect will be examined by vector error correction
(VEC) model, component share model and Granger causality test, while the volatility
spillover effect will be examined by DCC(1,1)-MVGARCH model.
3.2.1 Modeling of mean spillover effect. Most existing related literatures adopt VEC
model based on co-integration to examine the price discovery function of stock index futures 255
market and that of underlying spot market. The purpose of co-integration analysis is to
capture whether there is a long-term and stable equilibrium relationship between price of
futures market and that of spot market, while the application of VEC model is to portray the
reactions of futures price and spot price to short-term deviation from mean:
(1) Engle-Granger two-step method
According to the result of data stationary test, the two series are first-order integrated series and
only refer to two variables. Therefore, we shall adopt Engle-Granger two-step analysis method
to test the co-integration relationship between the two series. As this paper here is to investigate
the price discovery function of stock index futures, so we model a single-element regression
taking the stock index price series as dependent variable and the stock index futures price series
as independent variable. We shall first estimate the co-integrating regression using OSL to get
the residuals ε, and then test the stationary of the residuals ε. If the residual series has no unit
root, meaning the series is stable, which indicates that there is a co-integration relationship
between the price movement of CSI 500 stock index futures and that of CSI 500 stock index.
The single-element regression model established in this paper is shown in the
below equation:
lnðP CSI 500 Þ ¼ aþb lnðP I C Þþe (2)
In the equation, ln(PCSI 500) is the natural logarithm of CSI 500 stock index price, ln(PIC) refers
to the natural logarithm of CSI 500 stock index futures price, and ε refers to the residuals.
(2) VEC model
The basic expression of VEC model is shown in the below equation:
8
> X2 X p
>
> Dy1 ¼ c þp1 ð y1 Ey2 Þþ o1i;p Dyi;tp þe1;t
>
>
< i¼1 j¼1
ðt ¼ 1; 2; . . .; T Þ (3)
>
> X2 X p
>
> Dy ¼ c þp2 ð y1 Ey2 Þþ o2i;p Dyi;tp þe2;t
>
: 2
i¼1 j¼1
where Δyi is the difference form of variable y; ( y1−∈1 y2) the error correction term, representing
the long-term equilibrium relationship among variables; π1 the adjustment coefficient, mainly
Original series t-statistic Prob. First difference series t-statistic Prob.
LnPCSI 500 −0.4514 0.8979 −37.1069*** 0.0000 Table III.

LnPIC −0.4017 0.9066 −71.3655*** 0.0000 The results of
Note: ***Statistically significant at 1 percent level ADF text
CFRI reflecting the adjusted speed of any deviation of variables from long-term equilibrium state;
7,2 and ∈1 and ∈2 the coefficients of co-integration equation.
This paper establishes the following VEC model for our purposes:
8
>
> X
3 X
3
>
> DCSI 500t ¼ c1 þp1 ðlnðP CSI 500 ÞE1 lnðP I C ÞÞþ o11;i DCSI 500ti þ o12;i DI C ti þ e1;t
>
<
256 i¼1 i¼1
(4)
>
> X
3 X
3
>
> DI C t ¼ c2 þp2 ðlnðP CSI 500 ÞE1 lnðP I C ÞÞþ o21;i DCSI 500ti þ o22;i DI C ti þ e1;t
>
:
i¼1 i¼1
In Equation (4), ΔCSI 500t and ΔICt are the continuous returns of CSI 500 stock index spot
and futures, respectively; ln(PCSI 500) the natural logarithm of CSI 500 stock index prices;
ln(PIC) the natural logarithm of CSI 500 stock index futures prices; (ln(PCSI 500)−∈1ln(PIC))
the error correction term, representing the long-term equilibrium relationship among
variables; π1 and π2 the adjustment coefficients, describing the speed of adjustment back to
equilibrium; and ∈1 and ∈2 the coefficients of co-integration equation.
The optimal lag length is selected by the information criteria based on VAR. The results
indicate the optimal lag length is not uniform. Considering that three lag phases equal
15 minutes, which is consistent with the characteristics of Chinese stock market that trading
hour of stock index futures starts 15 minutes earlier and ends 15 minutes later than the spot
stock, eventually we chose three lags indicated by HQ statistics (15.4586) to model. In the
subsequent empirical analysis, we also adopt three lags for modeling on the same ground,
which will not be explained later.
(3) Component share model
To accurately quantify the contribution of futures market and spot market in price discovery,
Gonzalo and Granger (1995) propose Permanent-Transitory Model and decompose price into
permanent factor and transitory factor; on such basis, Booth et al. (1999), Chu et al. (1999),
and Harris et al. (2002a, b) further proposed to use Component Share Model to measure the
price discovery of futures market and that of spot market. The expression is shown as the
below equation:
jp2 j jp1 j
CS 1 ¼ ; CS 2 ¼ (5)
jp1 jþ jp2 j jp1 jþ jp2 j
Component share reflects the response of a market to instantaneous friction. The higher the
value is, the stronger the response of the market to instantaneous friction is, namely,
stronger price discovery ability.
By Component Share model, we carry out robust test for the estimation results of VEC
model.
(4) Granger causality test
In order to clear the direction of spillover effect, we shall carry out Granger Causality test
further so as to confirm the lead-lag relationship between the two variable series. The basic
principle of Granger causality analysis approach (Granger, 1969) is to test whether the
lagged value of a variable is beneficial for explaining another variable. Granger causality
test includes k-orders VAR of two variables, as shown in the below equations:
Dy1t ¼ m1 þ p11 ðLÞy1t1 þp12 ðLÞy2t1 þe1t (6)

The spillover
Dy2t ¼ m2 þp21 ðLÞy1t1 þp22 ðLÞy2t1 þe2t (7) effect
where μ1 and μ2 are constant drifting items and πij(L) is a polynomial with K−1 items
indicated by a lag operator L. The null hypothesis of Granger causality test is that y1 is not
the Granger cause of y2, meaning that π21(L) polynomial equals to 0, which can be tested by
standard methods, such as F-test.
3.2.2 Modeling of volatility spillover effect. As the obvious volatility clustering can be
257
seen from the return graph in Figures 1 and 2, the GARCH models should be used.
However, the single-variable GARCH model cannot reflect the linkage between CSI 500
stock index futures market and the underlying spot market; therefore, we shall apply
DCC-MVGARCH model to test the dynamic volatility spillover effect between the two
markets. With the GARCH models of each variable (variance equation) and the correlation
coefficient model (correlation equation), DCC-MVGARCH model can be used to estimate

large-scale correlation coefficient matrix and explore non-linear time-varying correlation
among variables.
DCC-MVGARCH model is a parametric approach of multivariable GARCH, which is
shown in the following equation:
8
>
> Y t ¼ FX t þU t
>
>
>
> U t 9Ot1 N ð0; H t Þ
>
<
H t ¼ Dt Rt Dt (8)
>
> n 1 n 1
>
> R ¼ Q Q Q
>
>
t t

t t

>
: Qt ¼ ð1y1 y2 ÞQþy1 ut1 u0
t1 þy2 Qt1
where Yt ¼ ΦXt+Ut is the mean equation of GARCH model, among which Ut is

residuals series, Ht the conditional variance matrix being composed of h2i;t , while
h2i;t ¼ di;0 þdi;1 u2i;t1 þdi;2 h2i;t1 the conditional variance being produced by the variance
equation of single-variable GARCH model, Dt the diagonal matrix taking arithmetic
square root of conditional variance as diagonal line, Rt the dynamic correlation coefficient
matrix, among which Qnt the diagonal matrix being composed of the number on the
diagonal of Qt. Taking the DCC-MVGARCH with two variables as an example, the
expression is as follows:
" pffiffiffiffiffiffi #
n
q11 0
Qt ¼ pffiffiffiffiffiffi
0 q22
P
Q ¼ T1 Tt¼1 ut ut0 is the unconditional variance matrix of standardized residual, among
which T refers to the length of time series, and ut0 ¼ D1 U t is vector standardized residual.
θ1 and θ2 are the coefficients of DCC-GARCH model, where θ1 reflects the influence of one-period
lag disturbing term on current volatility, and θ2 reflects the influence of one-period lag volatility
on current volatility. θ1+θ2 refers to the persistence of volatility with the value less than 1.
The closer to 1 the value is, the longer the persistence of volatility is.
Generally, DCC-MVGARCH model adopts two-step method to estimate. The first step is
the estimation of single-variable GARCH model so as to obtain the standardized residuals,
and the second step is to estimate Qt by using the standardized residual from the first step,
and eventually estimate correlation coefficient matrix.
CFRI We establish DCC (1,1)-MVGARCH(3,1) model to test volatility spillover effect.
7,2 The model specification is shown in the following equation:
8 " # " # " #

> CSI 500 X 3 j1;i CSI 500ti g1 u1
>
> ¼ þ þ
>
> j I C
>
> IC 2;i ti g 2 u2
>
<" # "
t
#
i¼1
" # " #
t
258 u21 d1;0 d1;1 u1;t1
2
d1;2 s1;t1
2
(9)
>
> ¼ þ þ þE t
> u22
> d2;0 d2;1 u22;t1 d2;2 s22;t1
>
>
>
>
t

: Qt ¼ ð1y1 y2 ÞQþy1 ut1 u0t1 þy2 Qt1
In the equation, φ, γ, δ, and θ are the parameters to be estimated, and Et the residual matrix
of variance equation.
3.3 Research design of spillover effect asymmetry

In this paper, the asymmetry inspection of spillover effect will be carried out from two
aspects, namely, mean spillover asymmetry and volatility spillover asymmetry.
3.3.1 Modeling of mean spillover asymmetry. In order to test mean spillover asymmetry,
we mainly use MS-VAR model to calculate the transition probability of different regimes via
parameter estimation, and apply regime-specific impulse response function to describe non-
linear characteristics of variables:
(1) MS-VAR Model
MS-VAR model provides a tool of parameter estimation for VAR model with regime transition
characteristic. When variables have regime transition characteristic, the VAR process bears
time-changing characteristic. However, samples should be divided into different regimes
(those regimes may be non-adjacent at all), and the VAR process tends to be stable in a certain
regime st. The switch among different regimes has a probability pij.
Generally, the transition characteristic estimation by traditional non-linear models
should add dummy variables, and divide samples into two or more parts. This dummy
approach can distinguish pre- and post-event occurrence periods. However, the dummy
variable can neither capture any kind of gradual adjustment from one regime to another nor
correctly reflect transient changes (Bohl et al., 2015).
Markov-switching models overcome the shortfalls of using dummy approach and can
collect samples with same characteristics together flexibly. The transition probability
among different regimes by parameter estimation can portray the relationship among
different regimes more clearly. Therefore, we shall employ Markov-switching-VAR model
instead of the dummy variable approach to examine the mean spillover asymmetry.
Because during the sample period, CSI 500 stock index underwent burst up from April 16
to June 15 and crash from June 15 to September 2, so we shall establish a MS-VAR model
with two regimes and three lags, namely, MS(2)-VAR(3) model. The model is described as
the following equation:
8
>
> X3 X 3
>
> CSI 500 m ðs Þ ¼ a CSI 500 m ð s Þ þ b1;i I C ti m1;t ðst Þ þ e1;t
>
<
t 1;t t 1;i ti 1;t t
i¼1 i¼1
(10)
>
> X3 X
3
>
> I C m ð s Þ ¼ a CSI 500 m ð s Þ þ b I C m ð s Þ þe
>
: t 2;t t 2;i ti 2;t t 2;i ti 2;t t 2;t
i¼1 i¼1
In Equation (10): The spillover
( effect

s2i;1 ; when st ¼ 1
ei;t eN 0; s2i;t ðst Þ ; s2i;t ðst Þ ¼ ; i ¼ f1; 2g;
s2i;2 ; when st ¼ 2
( 259
mi;1 ; when st ¼ 1
mi;t ðst Þ ¼ ; i ¼ f1; 2g:
mi;2 ; when st ¼ 2
α, β, and μ, are the parameters to be estimated.

(2) Impulse response function

We use impulse response function to analyze the degree of asymmetry further. The basic
thought of impulse response function analysis is that one information shock on variable i
will not only directly affect variable i but also can be transmitted to all other endogenous
variables by VAR model. In this paper, what the impulse response function describes is the
dynamic influence process of one information shock on the prices of CSI 500 stock index
futures market and the spot market.
3.3.2 Modeling of volatility spillover asymmetry. We choose DCC-EGARCH model to
examine the volatility spillover asymmetry between CSI 500 stock index futures market and
the underlying spot market. As one of the DCC-MVGARCH models, DCC-EGARCH also
adopts two-step estimation procedure, which estimates the single-variable EGARCH model
of each variable first, and then DCC model.
EGARCH model is an asymmetric GARCH model proposed by Nelson (1991).
The main advantage of EGARCH is that lnðs2t Þ; the dependent variable of variance
equation, can be either positive or negative, which can guarantee a positive value of
s2t ¼ elnðst Þ as recovered in the form of variance, so it does not need conditional constraints
2
like general GARCH model to ensure variance being positive. In addition, d3 lnðs2t1 Þ,
namely GARCH item, can reflect the volatility clustering effect as other GARCH models.
The larger the coefficient is, the longer the influence of current volatility on subsequent
volatility will be. δ1(ut−1)/(σt−1) and δ2(|ut−1|)/(σt−1) are two disturbance terms and
comply with standardized normal distribution. Refer to the below equation for
detailed expression:
8
< ln s2t ¼ d0 þ ðd1 þd2 Þjsut1 j þd3 ln s2t1 ; ut1 40
t1
(11)
: ln s2t ¼ d0 þ ðd1 d2 Þjsut1 j þd3 ln s2t1 ; ut1 o0
t1
In the equation, δ1 is a mark applied to judge whether variables have asymmetry. If δ1 ¼ 0,

it means that the change of variance is symmetrical, and the return volatility has no obvious
change in either the rising period or the declining period. If δ1 W0, it indicates that the
volatility in the rising period is significantly larger than that in the declining period, and
the rate of price rising caused by good news in the bull market is larger than that of price
falling caused by bad news in the bear market. On the contrary, if δ1 o0, the rate of
price falling caused by bad news in the bear market is larger than that of price rising caused
by good news in the bull market.
CFRI The DCC-EGARCH model established for our purposes is DCC (1,1)-EGARCH(3,1) model
7,2 and is specified as follow:
8 " # " # " #
> CSI 500 X3 j1;i CSI 500ti g1 u1
>
> ¼ þ þ
>
> j2;i I C ti g2
>
> IC u2
>
>
t i¼1
2 t

3
>
<" # " # 2 3
260 ln u1 2
d1;0 d u t1
þd j u t1 j d 1;3 ln s2
5 6
7
1;1 st1 1;2 st1 1;t1 (12)
>
> 2 ¼ þ4 jut1 j þ 4
5 þE t
>
> ln u d d1;1 st1 þd2;2 st1
ut1
d2;3 ln s2;t1
2
>
> 2 2;0
>
>
t
>
>
: Q ¼ ð1y y ÞQþy u u0 þy Q
t 1 2 1 t1 t1 2 t1
In the equation, φ, γ, δ, and θ are parameters to be estimated by the model, and Et is the
residual matrix of variance equation.
4. Empirical results of spillover effect

4.1 Results of mean spillover effect
4.1.1 Co-integration relationship. The results of Engle-Granger two-step test are shown in
Table IV. According to the univariate regression model established in Equation (2), we obtain
the following regression result: Ln CSI 500 ¼ 928.722324816 + 0.911291985792 Ln IC. Then,
we carry out the ADF unit root test on the residuals, and the result shows that the residual
series rejects the null hypothesis of existing a unit root at 1 percent level, which means that the
residual series is stationary, that is, there is a co-integration relationship between the price
movement of CSI 500 stock index futures and that of CSI 500 stock Index spot.
4.1.2 Price discovery function. Table V provides the test results of VEC model and CS
model. The regression coefficient π (adjustment coefficient) of error correction term is an
important parameter to be observed. There should be at least one adjustment coefficient π1
or π2 that is significant, otherwise it means there is no long-run equilibrium relationship
Coefficient Independent variable ADF
Table IV. t-statistics 928.7223 0.911292 −5.7122

Result of EG p-value 0.0000 0.0000 0.0000
co-integration test Note: The ADF is the result of the augmented Dickey-Fuller unit root test
Dependent variable – CSI 500 Dependent variable – IC

Coefficient t-statistics p-value Coefficient t-statistics p-value
π1 −0.0163 −4.4992*** 0.0000 π2 0.0012 0.2446 0.8067

ω11,1 −0.2292 −12.0212*** 0.0000 ω21,1 0.0384 1.4695 0.1417
ω11,2 −0.0298 −1.5303 0.1260 ω21,2 0.0021 0.0779 0.9379
ω11,3 0.0544 2.9297*** 0.0034 ω21,3 −0.0188 −0.7365 0.4614
ω12,1 0.1796 12.7311*** 0.0000 ω22,1 −0.0759 −3.9230*** 0.0001
ω12,2 0.0624 4.2686*** 0.0000 ω22,2 −0.0273 −1.3608 0.1736
ω12,3 0.0109 0.7636 0.4451 ω22,3 0.0038 0.1931 0.8469
Table V. c1 0.0000 −0.5601 0.5755 c2 −0.0001 −0.7737 0.4391
The results of VECM CS1 0.0694 CS2 0.9306
and CSM tests Note: ***Statistically significant at 1 percent level
between the two variables. From Table V, we can find that π1 is significant at 1 percent The spillover
confidence level, while π2 is not significant and the coefficient is only 0.0012, indicating that effect
the response of IC to error is very small and may be 0 in statistics, which suggest the
adjustment speed of IC to equilibrium is very quick (Damodar, 2013). It means that the price
discovery speed of CSI 500 stock index futures market is quicker than that of the underlying
spot market.
Observing the regression coefficients in the left part of Table V, we find that the price 261
of CSI 500 stock index futures has significant and positive influence on that of the lags 1 and
2 CSI 500 stock index spot, with coefficients being 12.7311 and 4.2686, respectively. It
signifies that the current price of stock index futures can lead spot price to change in the
same direction within ten minutes, and such influence declines in the subsequent five
minutes. While the price of CSI 500 stock index spot has negative influences on that of lags 1
and 2 CSI 500 stock index spot, the influence on lag 2 is not significant. It means that the
current price of CSI 500 stock index spot can lead the spot price to change in the reverse
direction within five minutes. Observing the regression coefficients in the right part of
Table V, we find that the price of CSI 500 stock index futures has significant and smaller
negative influence on that of lag1 itself with coefficient being 0.0759. Although the current
price of CSI 500 Spot has positive influence on that of lags 1 and 2 CSI 500 stock index
futures, it is not significant in statistics.
According to the test results of Component Share model, CS1 coefficient of CSI 500 stock
index spot is 0.0694, and CS2 coefficient of CSI 500 stock index futures is 0.9306, which
means that CSI 500 stock index futures play a major role in price discovery. Such result also
reflects the test results of VEC model robust.
4.1.3 Lead-lag relationship. The test results of Granger causality is shown in Table VI.
Based on the results of χ2 test, the model rejects the null hypothesis that IC does not Granger
cause CSI 500 at 1 percent confidence level, which means that CSI 500 stock index futures
can provide more information for the price prediction of CSI 500 stock index spot. However,
the model cannot reject the null hypothesis that CSI 500 does not Granger cause IC, which
means that the price changes of CSI 500 stock index spot does not cause that of CSI 500
stock index futures.
Obviously, the test results of Granger causality are identical with the conclusions of VEC
model’s parameter analysis, that is, the price changes of CSI 500 stock index futures have a
significant leading role in that of CSI 500 stock index spot, while the leading role of CSI 500
stock index is not significant in statistics. Therefore, CSI 500 stock index futures market has
significant unidirectional mean spillover effect on its underlying spot market.
4.2 Results of volatility spillover effect

4.2.1 ARCH effect. Although the figures of return graph show obvious volatility clustering
phenomenon, we still run ARCH-LM test to verify whether there is ARCH effect in the two
return series. Table VII repots the test results.
The results indicate that the two variables reject the null hypotheses at 1 percent
confidence level, meaning that the two return series do exist ARCH effect, and it is suitable
for using GARCH models.
Null hypothesis Obs. Freedom χ2 stat. Prob.
ln(PIC) does not Granger cause ln(PCSI 500) 4,605 3 164.1760*** 0.0000 Table VI.
ln(PCSI 500) does not Granger cause ln(PIC) 3 2.8044 0.4228 The results of
Note: ***Statistically significant at 1 percent level Granger causality test
CFRI 4.2.2 Coefficient estimation of DCC(1,1)-MVGARCH(3,1). Table VIII exhibits the results of
7,2 regression coefficients of DCC(1,1)-MVGARCH (3,1). In the variance equations of the two
return series, the sum of ARCH coefficient and GARCH coefficient is smaller than 1,
satisfying the stability condition of GARCH model. In other words, the impact of volatility
shocks will be eliminated within limited time, and the DCC(1,1)-MVGARCH (3,1) model is
valid. Meanwhile all the regression coefficients are significant, which means that the
262 volatility clustering effect of variables is obvious.
The value of θ1, a coefficient of DCC-GARCH model, being 0.0293 means that the
dynamic heteroscedasticity of CSI 500 stock index futures and the CSI 500 stock index spot
is less affected by the mean residual square of the prior period; θ2 being 0.3129 means that
the dynamic heteroscedasticity of CSI 500 stock index futures and the CSI 500 stock index
spot bears weak connection with that of the prior period; and θ1+θ2 ¼ 0.35 means that the
persistent of volatility is relatively transitory.
After the parameter estimation, the generated dynamic correlation coefficient sequence
diagram is shown in Figure 3. We find that there is obviously and relatively stable positive
correlation between CSI 500 stock index futures market and the underlying spot market.
The maximum value of the dynamic correlation coefficient is 0.7799, the minimum value is
0.1293, the mean value is 0.4848, and the median value is 0.4839, indicating that the correlation
coefficient is clustered around 0.4839. However, correlation coefficients between 2,300 and
3,000 witness larger volatility, which rightly fall in the duration from June 15 to July 9.
During this period, the stock market suffered slump, which proves that extreme market
conditions can have larger interference for the relationship between futures and spot stock.
On the whole, the volatility of CSI 500 stock index futures market and that of its
underlying spot market bear obviously positive co-movement and transitivity, indicating
that there is significant positive spillover effect between them.
Null hypothesis F-statistic Prob. χ2 stat. Prob.
Table VII. No ARCH effect in CSI 500 8.1301*** 0.0044 8.1193*** 0.0044
Results of No ARCH effect in IC 204.6808*** 0.0000 196.0555*** 0.0000
ARCH-LM test Note: ***Statistically significant at 1 percent level
Dependent
variable – CSI Coefficient z-statistics Prob. Dependent variable – IC Coefficient z-statistics Prob.
Mean equation
γ1 0.0001 1.7747* 0.0759 γ2 0.0001 1.0498 0.2938
φ1,1 −0.0567 −2.8253*** 0.0047 φ2,1 −0.0162 −1.0955 0.2733
φ1,2 0.0273 1.6048 0.1085 φ2,2 0.0014 0.0881 0.9298
φ1,3 0.0300 1.6692* 0.0951 φ2,3 0.0122 0.8168 0.4140
Variance equation
δ1,0 0.0000 24.7523*** 0.0000 δ2,0 0.0000 7.0830*** 0.0000
δ1,1 0.1068 20.4709*** 0.0000 δ2,1 0.0524 27.5607*** 0.0000
δ1,2 0.7820 91.3801*** 0.0000 δ2,2 0.9460 501.9353*** 0.0000
Table VIII.
DCC(1,1)-MVGARCH DCC model estimates
(3,1) parameter θ1 0.0293 2.5827*** 0.0098 θ2 0.3129 1.7394* 0.0820
estimation Notes: *,***Statistically significant at 10 and 1 percent level, respectively
0.8 The spillover
0.7 effect
0.6
0.5
0.4 263
0.3
Figure 3.
0.2 Series dynamic
correlation coefficient
0.1 line graph
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
5. Result and analysis of spillover effect asymmetry

5.1 Asymmetry of mean spillover effect
5.1.1 Validity of MS (2)-VAR(3) model. In this paper, we use Ox3.40 and GiveWin2
statistical software and the MSVAR software package[4] launched by Hans-Martin Krolzig
in 1998 to estimate the parameters of MS(2)-VAR(3) model. The test result of the model
validity is shown in Table IX.
As can be seen from Table IX, the p-value of χ2 in LR linearity test significantly rejects the
null hypothesis of model being linear, for which it is proper to establish a non-linear model.
5.1.2 Parameter estimation of MS (2)-VAR (3) model. The parameter estimation of
model is shown in Table X. It can be observed that the significance level of regression
coefficients at the three lag phases is poor. However, we still retain three lags so as to make
comparison with the previous linear model.
MS-VAR model VAR model
log-likelihood 37,916.3470 35,625.5031

AIC −16.4570 −15.4651
HQ −16.4452 −15.4568 Table IX.
SC −16.4235 −15.4414 The validity of
LR linearity test 4,581.6878 χ2(5) p-value 0.0000 χ2(7) p-value 0.0000 MS(2)-VAR(3) model
Dependent variable – CSI 500 Dependent variable –- IC

Parameters Coefficient t-statistic Prob. Parameters Coefficient t-statistic Prob.
μ1,1Regime 1 −0.0012 −2.307** 0.0211 μ1,2Regime 1 −0.0006 4.3415*** 0.0000

μ2,1Regime 2 0.0001 3.1323*** 0.0017 μ2,2Regime 2 0.0002 2.0626** 0.0392
α1,1 −0.0402 17.2642*** 0.0000 α2,1 −0.3182 −1.7744* 0.0761
α1,2 −0.0213 −2.7941*** 0.0052 α2,2 −0.0472 −0.9903 0.3221
α1,3 −0.0047 1.5679 0.1170 α2,3 0.0241 −0.2358 0.8136
β1,1 −0.0425 19.8351*** 0.0000 β2,1 0.2768 −2.322** 0.0203
β1,2 0.0003 6.4342*** 0.0000 β2,2 0.0885 0.0135 0.9892
β1,3 −0.0152 0.8962 0.3702 β2,3 0.0116 −0.8645 0.3874 Table X.
σ1,1Regime 1 0.0100 n/a n/a σ2,1Regime 1 0.0092 n/a n/a The result of
σ2,1Regime 2 0.0036 n/a n/a σ2,1Regime 2 0.0026 n/a n/a MS (2)-VAR (3)
Notes: *,**,***Statistically significant at 10, 5, and 1 percent level, respectively model estimation
CFRI We can see from the parameters that the co-movement relation between CSI 500 stock index
7,2 futures market and the underlying spot market is significant in a short time, and as time
goes by, the influence of historical price information gradually declines. With regard to the
parameter symbols, the influence of CSI 500 stock index futures price on the underlying spot
price is significantly positive, and the influence of lagged CSI 500 stock index spot price on
current spot price is negative. While the influence of CSI 500 stock index spot price on CSI
264 500 stock index futures price is significantly negative, the influence of lagged CSI 500 stock
index futures price on current futures price is significantly positive.
We hold that considering the dimension of high-frequency time series, futures can exert
positive influence on spot price due to its relatively flexible trading system as well as relatively
mature market participants. For the existence of positive feedback trading strategy, futures
price can only maintain the originally upward (downward) tendency of inertia for a short time.
The negative influences of spot price on the price of futures and itself are mainly driven by mean
reversion, which will witness larger deviation and the process of mean reversion in a short time.
5.1.3 Estimation of regime transition probability. The estimation of regime transition
probability and the division of sample regimes are shown in Table XI. Referring to the mean
parameter μ in Table X, we can roughly judge that in the MS(2)-VAR(3) model, regime 1 is
the market declining phase and regime 2 is the market rising phase. According to the sample
division of regimes 1 and 2 in Table XI, we can find that in regime 1, the proportion of
the sample is smaller and the duration is shorter, while in regime 2, the proportion of the
sample is larger and the duration is longer. On the whole, the duration of the two markets in
the rising circle is longer than that of in the declining circle.
Figure 4 shows the time-varying probability after smoothing. We find the transformation
probability between regimes is lower, and the probability of staying in certain regime is
higher, indicating that the non-linear characteristic of the samples is more obvious. Regimes
1 and 2 can describe the dynamic characteristic of variables in a better manner. The two
regions have high continuity, and the instability probability of jump is small.
On the whole, the mean spillover effect within sample range is significant with obvious
asymmetry; the transition probability between regimes is lower, but the probability of
staying in the current regime is higher; the two regimes correspond to the declining period
and the rising period, respectively.
5.1.4 Degree of asymmetry. In this paper, we use impulse response function to test the
degree of asymmetry. The impulse response of the MS(2)-VAR(3) model is still carried out in
different regimes. Figure 5 is the test results of the impulse response function.
The upper half of Figure 5 is the impulse response result of regime 1, and the lower half is
the impulse response result of regime 2, which are similar in pattern. It means that, either in
regime 1 or in regime 2, the correlation between the two markets is relatively stable. As can
be seen from the comparison, the corresponding function value of subsequent one positive
shock by CSI 500 stock index futures on CSI 500 stock index in regime 1 is larger than that
of in regime 2. The function value in regime 1 is about 0.006 (top blue line in the left) and that
in regime 2 is 0.002 approximately (bottom blue line in the left), which means that, the shock
of CSI 500 stock index futures market on its underlying spot market in the different market
phases is not asymmetric. In the declining phase, the shock of CSI 500 stock index futures
Transition probabilities
Regime 1 Regime 2 No of Obs. Prob. Duration
Table XI.
Regime transition Regime 1 0.8533 0.1467 1,142.8 0.2476 6.81
probabilities Regime 2 0.0483 0.9517 3,462.2 0.7524 20.71
(a) The spillover
0.05 IC CSI500 effect
0.00
–0.05
350 700 1,050 1,400 1,750 2,100 2,450 2,800 3,150 3,500 3,850 4,200 4,550
Conditional variances of CSI and IC 265
(b)
1.0
0.5
350 700 1,050 1,400 1,750 2,100 2,450 2,800 3,150 3,500 3,850 4,200 4,550
Time varying probability of Regime 1
(c)
1.0
Figure 4.
0.5 Regime-specific
conditional variation
and time-varying
350 700 1,050 1,400 1,750 2,100 2,450 2,800 3,150 3,500 3,850 4,200 4,550
probability
Time varying probability of Regime 2
0.010 IC (cum) CSI500 (cum) 0.0075 IC (cum) CSI500 (cum)
0.008 0.0050
0.0025
0.006
0.0000
0.0 2.5 5.0 7.5 10.0 0.0 2.5 5.0 7.5 10.0
Regime 1: The response to one shock on IC Regime 1: The responses to one shock on CSI
0.0035 IC (cum) CSI500 (cum)

0.0020 IC (cum) CSI500 (cum)
0.0030 0.0015
0.0025 0.0010
0.0005
0.0020 Figure 5.
0.0000 Regime special
cumulative impulse
0.0 2.5 5.0 7.5 10.0 0.0 2.5 5.0 7.5 10.0
response
Regime 2: The response to one shock on IC Regime 2: The responses to one shock on CSI
market on the spot market is obviously larger than that of in the rising phase.
Correspondingly, the mean reverting of the spot market in the declining phase is more
obvious than that of in the rising phase.
In short, there is significant mean spillover from CSI 500 stock index futures market to
the spot market, which is more obvious in the declining phase and takes on the enlarged
volatility range in the same direction.
CFRI 5.2 Asymmetry of volatility spillover effect
7,2 Table XII reports the parameter estimation results of DCC(1,1)-EGARCH(3,1) model.
We find that δ1,2 and δ2,2 are significant and negative, which means that the response of the
two CSI 500 markets to information is significant asymmetry, that is, the range of price
increasing trigged by good news in market rising phase is less than that of price
falling trigged by bad news in the market declining phase. The value of θ1 being 0.0083, less
266 than the coefficient in DCC(1,1)-MVGARCH(3,1), means that the current dynamic
heteroscedasticities of the CSI 500 stock index futures return and the CSI 500 stock index
spot return are less affected by the prior residual mean square of the two market returns.
The value of θ2 being 0.9321 means that the current dynamic heteroscedasticities of the two
market returns mainly depend on the prior ones, and the correlation coefficient between the
two markets is greatly affected by the prophase. The sum of θ1 and θ2 being close to 1 means
that the volatility is highly persistent.
Figure 6 is the dynamic correlation graph of CSI 500 stock index futures return and the
CSI 500 stock index spot return, according to which the changes of dynamic correlation
Dependent Dependent
variable – CSI 500 Coefficient z-statistics p-value variable – IC Coefficient z-statistics p-value
Mean equation
γ1 0.0003 5.0941*** 0.0000 γ2 0.0002 3.5208*** 0.0004
φ1,1 −0.0871 −7.0819*** 0.0000 φ2,1 −0.0151 −1.1328 0.2573
φ1,2 0.0320 2.5402** 0.0111 φ2,2 0.0065 0.4445 0.6567
φ1,3 0.0434 4.4776*** 0.0000 φ2,3 0.0124 0.8728 0.3828
Variance equation
δ1,0 −0.0363 −14.7307*** 0.0000 δ2,0 −0.0939 −15.2934*** 0.0000
δ1,1 0.0150 17.8598*** 0.0000 δ2,1 0.0556 28.2788*** 0.0000
δ1,2 −0.0438 −27.3761*** 0.0000 δ2,2 −0.0524 −14.8406*** 0.0000
δ1,3 0.9978 3,303.8250*** 0.0000 δ2,3 0.9953 1,614.5580*** 0.0000
Table XII. DCC model estimates

DCC(1,1)-EGARCH(3,1) θ1 0.0083 3.0566*** 0.0022 θ2 0.9321 25.1328*** 0.0000
parameter estimation Notes: *,**,***Statistically significant at 10, 5, and 1 percent level, respectively
0.7
0.6
0.5
0.4
0.3
Figure 6. 0.2
Series dynamic
correlation coefficient
line graph 0.1
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
coefficients are obvious with larger volatility. The mean value of correlation coefficients is The spillover
0.4863, and obvious abnormality occurs during the range between 2,500 and 3,000. effect
Such abnormality may be explained by the slump suffered by the stock market since
June 15. As a result of the daily price limit, when stock index futures rapidly reach the down
limit, the price changes of the spot market may be lagged to a certain degree, and thus
causing deviation of their correlation.
These results are not significantly different from the results of DCC (1,1) -MVGARCH 267
(3,1) model, but the fitting effect of the model is better and the asymmetry is very significant.
It also shows that the results obtained in this paper are relatively stable and reliable.
We conclude that there is a significant volatility spillover effect between CSI 500 stock
index futures and CSI 500 spot market, because stock index futures market has a faster
reaction speed to information, that is, the price discovery function is more obvious;
therefore, the volatility of the CSI 500 spot market is following that of CSI 500 futures
market. At the same time, the volatilities of CSI 500 stock index futures and its underlying
spot market are significant asymmetric, characterized by relatively moderate and slow
during the period of the markets rising, yet violent and rapid during the period of the
markets falling.
6. Summary and conclusion

Based on the price and return data of CSI 500 stock index futures and CSI 500 stock index
from April 16, 2015 to September 1, 2015, this paper investigated the spillover effect between
CSI 500 stock index futures market and its underlying spot market. In this paper, we first
examined the price mean spillover effect by using VEC model based on co-integration and
Granger causality analysis and the volatility spillover effect by the DCC(1,1)-MVGARCH(3,1)
model, then tested the asymmetry of the mean spillover and the volatility spillover by
employing MS(2)-VAR(3) model and DCC(1,1)-EGARCH(3,1) model, respectively.
The empirical results as following:
First, the price discovery and the response to market information of CSI 500 stock index
futures market are much faster than that of the underlying spot market. Moreover, there is a
significant one-way mean spillover from CSI 500 stock index futures market to the spot
market. The price changes of the spot market lag behind that of CSI 500 stock index futures
for about ten minutes. Meanwhile, the dynamic correlation between the two markets was
relatively stable with the mean value around 0.48. However, in extreme market conditions,
there is significant fluctuations in dynamic correlation, and the volatility is persistence.
We hold that the difference in price discovery between the futures market and the spot
market is theoretically related to the different emphasis of the two markets. Spot market
mainly reacts to firm-specific information, while the futures market is more sensitive to
market-wide information. From the view of price discovery path, in the spot market, the
firm-specific information first affects the price of individual stocks, then that of more stocks,
and finally that of whole market portfolio; while in futures market, the entire portfolio’s
information affects directly futures price, so stock index futures make a faster response to
information and play a guiding role in the spot price movement. In practice, it is also related
to the fact that there are different trading systems in the two markets. First, the trading time
limits for the two markets are different. The T+0 trading system is adopted in stock index
futures markets, which means that the futures contract can be bought and then be sold on
the same day, while the T+1 trading system is set in the spot markets, which means that the
stock brought today cannot be sold on the same day, and only can be sold in the next
trading day. So the trading speed of the spot markets cannot keep up with the pace of the
stock index futures markets. Second, the levels of information disclosure for the two
markets are different. The information disclosure requirement of the spot market is
relatively not as sufficient as that of the stock index futures market. Third, the participants
CFRI of the two markets are also different; contrary to the participants of the spot markets being
7,2 mainly retail investors, the participants of the stock index futures markets are mainly
institutional investors, characterized with quicker response to market information. So the
prices of stock index will change up with the price expectation formed in the stock index
futures markets,
Second, there is significant volatility asymmetry in both CSI 500 stock index futures
268 market and its underlying spot market, characterized by relatively moderate and slow in the
process of market rising yet violent and rapid in the process of market falling. Moreover, the
spillover effect of price mean value from CSI 500 stock index futures market to the
underlying spot market also has a significant asymmetric characteristics; the impact of CSI
500 stock index futures market by a shock on its underlying spot market is relatively small
in the process of market rising yet relatively large in the process of market falling. At the
same time, the volatility in the process of market falling is greater than that of in the process
of market rising. Meanwhile, the volatility spillover from CSI 500 stock index futures market
to the underlying spot market is also significantly asymmetric, such that the impact of
futures market volatility on the underlying spot market caused by a bad news shocks in the
process of market falling is much stronger than that of caused by a good news shocks in
the process of market rising.
This finding is consistent with the observed situation. In fact, this wave of rising and
falling of Chinese stock market since July of 2014 is greatly related to the use of leveraged
funds from inside and outside the stock market. In the process of stock price rising, the
leverage ratio was gradually declined, and the role in promoting the market was gradually
weakened, so stock market rising was relatively slow and moderate. While in the process of
stock price falling, passively increased leverage ratio enlarged the investment risk, as a
result, capital began to flee, and it accelerated stock price falling. Upon the price hit the
mandatory liquidation line, investors could not but sell off the holdings regardless of the
cost. One forced liquidation of leveraged fund caused by stock market crash would likely
trigger additional forced liquidation of other leveraged funds, providing kinetic energy for
stock falling and resulting in continuous slump in the stock market. We argue that with the
margin system, stock index futures itself is a leverage tool and plays the same role of
increasing market asymmetry as other leveraged financial products, which makes the price
rising relatively moderate and slow during the period of the markets rising yet price falling
violent and rapid during the period of the markets falling.
Third, according to the above findings, we draw the following conclusions: due to the
asymmetry of trading system and information disclosure requirement between the stock
index futures markets and their underlying spot markets in China, stock index futures
markets acted as the lead role in the lead-lag relationship of the two markets, and their own
leverages led to the price volatility being more violent and rapid in the declining markets.
Therefore, although the stock index futures itself was not the “prime culprit” of Chinese
stock market crash in 2015, the existence of futures on stock indexes did accelerate and
exacerbate the stock market decline.
We believe that the fundament cause of Chinese stock market crash in 2015 was the
deviation of the stock market rising from the fundamentals of macro-economic downturn.
The fuse was the sudden tightness of the liquidity caused by the thorough investigation of
non-compliant leveraged funds from regulators and intensive IPO. With a strong decline
expectation, the market participants sold off a large number of contracts in the stock index
futures market to clear holding positions as soon as possible in order to avoid the systemic
risk. However, the price change in the spot market lagged behind that of in the stock index
futures market because of the T+1 trading system, as a result the stock index futures had
relatively large discount and formed a positive basis. The index arbitrage trader sold the
shares in the spot stock market and bought futures in the stock index futures market to gain
profit (reverse arbitrage); thus, the selling pressure of the futures market was transferred to The spillover
the underlying stock spot market. However, a large number of sale orders could not be effect
cleared in time due to liquidity reasons, such as daily trading limit and share suspension,
which caused further panic in the markets, and then triggered a new round of selling stock
index futures contracts, eventually resulting in the “down cycle,” leading stock prices to fall
continuously. As this process repeated, the trajectory of the price movements in both stock
index futures market and the underlying spot market were like a dipping waterfall and 269
appeared the “waterfall effect” as the US stock market crash in 1987.
Therefore, it is recommended to unify the stock index futures and spot market trading
system in order to link the two markets more closely, to strengthen supervision, and strict
control of leveraged funds, to improve the daily limit-up and limit-down trading system for
reasonable and enough market liquidity, and to increase the variety of financial hedging
tools to prevent excessive use of a single tool while stop inappropriate contracts.
Notes
1. Liu Shuwei. Severely punish shorting Chinese stock market. http://weibo.com/p/1001603860169502
117719 (accessed July 2, 2015).
2. Ba Shusong. Stock index futures: to blame or develop vigorously. www.cs.com.cn/gppd/zzyj20
14/201508/t20150828_4787831.html (accessedAugust 28, 2015).
3. According to the month of continuous contract rules in WIND database, after the stock index
futures delivery date, the next month contract data are continued to the contract.
4. Discussion on the estimation method of MS-VAR model see Krolzig (1997).
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Corresponding author
Xuejun Fan can be contacted at: xjfan@finance.ecnu.edu.cn
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Xuejun Fan and De Du Received 24 August 2016

underlying spot market.

3. Sample, data, and methodology

that can be free from microstructure noise (Andersen et al., 2001).

Rt ¼ lnðP t Þ lnðP t1 Þ (1)

Mean Median Max. Min. SD Skew. Kurt. Obs.

Mean Median Max. Min. SD Skew. Kurt. Obs

Original series t-statistic Prob. First difference series t-statistic Prob.

LnPCSI 500 −0.4514 0.8979 −37.1069*** 0.0000 Table III.

Dy1t ¼ m1 þ p11 ðLÞy1t1 þp12 ðLÞy2t1 þe1t (6)

coefficient model (correlation equation), DCC-MVGARCH model can be used to estimate

where Yt ¼ ΦXt+Ut is the mean equation of GARCH model, among which Ut is

8  " # " # " #

3.3 Research design of spillover effect asymmetry

α, β, and μ, are the parameters to be estimated.

(2) Impulse response function

In the equation, δ1 is a mark applied to judge whether variables have asymmetry. If δ1 ¼ 0,

residual matrix of variance equation.

4. Empirical results of spillover effect

Coefficient Independent variable ADF

Table IV. t-statistics 928.7223 0.911292 −5.7122

Dependent variable – CSI 500 Dependent variable – IC

π1 −0.0163 −4.4992*** 0.0000 π2 0.0012 0.2446 0.8067

4.2 Results of volatility spillover effect

Null hypothesis Obs. Freedom χ2 stat. Prob.

Null hypothesis F-statistic Prob. χ2 stat. Prob.

5. Result and analysis of spillover effect asymmetry

MS-VAR model VAR model

log-likelihood 37,916.3470 35,625.5031

Dependent variable – CSI 500 Dependent variable –- IC

μ1,1Regime 1 −0.0012 −2.307** 0.0211 μ1,2Regime 1 −0.0006 4.3415*** 0.0000

0.010 IC (cum) CSI500 (cum) 0.0075 IC (cum) CSI500 (cum)

0.0035 IC (cum) CSI500 (cum)

Table XII. DCC model estimates

6. Summary and conclusion

reserve board”, Presidential Mechanisms, Hard Press Publishing, Washington, DC.

pp. 90-100 (in Chinese).

Financial Research, No. 12, pp. 146-158 (in Chinese).

Potrebbero piacerti anche

8 " # " # " #

μ1,1Regime 1 −0.0012 −2.307 0.0211 μ1,2Regime 1 −0.0006 4.3415* 0.0000