Abstract
This thesis explores the pricing of futures contracts in the Chinese markets, focusing on pricing factors, factor strategies, and the price discovery process. It examines the basis-momentum predictability of futures returns (Chapter 2), excessive arbitrage activities within factor strategies (Chapter 3), and the impact of regulatory changes on price discovery in the stock index futures market (Chapter 4). Each chapter presents novel empirical evidence that enhances our understanding of Chinese futures markets.In Chapter 2, Basis-Momentum in the Chinese Commodity Futures Markets, we investigate the predictive power of basis-momentum as a novel return factor in the Chinese commodity futures markets. By decomposing futures returns into nearby returns (spot premia) and spreading returns (term premia), we compare basis-momentum with traditional factors such as basis and momentum. Our findings suggest that while basis-momentum is priced, it does not explain cross-sectional return variation more effectively than traditional factors. Additionally, the momentum factor accounts for more price variation than basis-momentum and is more closely related to the positions of hedgers. Basis-momentum predicts futures returns only when speculators’ hedging pressure is high. This chapter provides valuable insights into Chinese commodity futures markets, indicating that traditional pricing factors remain more influential than basis-momentum in explaining futures prices.
In Chapter 3, Mispricing and Arbitrage Activities in Chinese Futures Markets, we examine the effect of crowded trading on the returns of popular factor strategies, including momentum, basis, value, and basis-momentum. Using weekly data from Chinese commodity futures markets, we measure factor strategy crowding indirectly by analyzing the return correlations among factor portfolios. Our results reveal a strong negative correlation between the level of crowding and expected factor strategy returns, which are predominantly observed during periods of low crowding. By linking variations in our crowding measure to arbitrage activities, we find that the decline in returns is largely driven by fluctuations in arbitrage costs. Additionally, we introduce a dynamic crowding strategy that adjusts thresholds based on market volatility, resulting in improved performance compared to traditional factor strategies.
In Chapter 4, Price Discovery in the Chinese Stock Index Futures Market, we explore the price discovery process in the CSI 300 Index futures market and its underlying index market. This study focuses on the strict policy restrictions imposed in 2015 and the subsequent relaxations, particularly their impact on the futures market’s role in price discovery. Using the Information Share Model, we find that, prior to the implementation of the trading restrictions, the futures market leads the spot market in the price discovery. The trading restrictions significantly increase transaction costs in the futures market, weakening its price discovery ability. Furthermore, the restrictions alter the asymmetric relationship between futures and spot prices, reducing the amplifying effect of futures on price declines while enhancing their impact during price increases. As trading restrictions relax, the price discovery function of the futures market improves. These findings deepen our understanding of price discovery mechanisms in Chinese futures markets under different regulatory frameworks and market conditions.
| Date of Award | 12 Jul 2025 |
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| Original language | English |
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| Supervisor | Xiaoquan Liu (Supervisor) & Kian Howe Ong (Supervisor) |