Position limit for the CSI 300 stock index futures market

Authored by Wei Zhang, Xiong Xiong, Lijian Wei, Lei Shi

Date Published: 2015

DOI: 10.1016/j.ecosys.2015.01.003

Sponsors: Chinese National Natural Science Foundation

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

The aim of this study was to find the optimal position limit for the Chinese stock index (CSI) 300 futures market. A low position limit helps to prevent price manipulations in the spot market, and thus keeps the magnitude of instantaneous price changes within the tolerance range of policymakers. However, setting a position limit that is too low may also have negative effects on market quality. We propose an artificial limit order market with heterogeneous interacting agents to examine the impact of different levels of position limits on market quality, measured as liquidity, return volatility, efficiency of information dissemination, and trading welfare. The simulation model is based on realistic trading mechanisms, investor structure, and order submission behavior observed in the CSI 300 futures market. Our results show that on the basis of the liquidity status in September 2010, raising the position limit from 100 to 300 could significantly improve market quality and at the same time keep the maximum absolute price change per 5 s below the 2\% tolerance level. However, the improvement becomes only marginal if the position limit is further increased beyond 300. Therefore, we believe that raising the position limit to a moderate level can enhance the functionality of the CSI 300 futures market, which should benefit the development of the Chinese financial system. (C) 2015 Published by Elsevier BM.

Tags

policy design Manipulation