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Position limit for the CSI 300 stock index futures market

Author

Listed:
  • Wei, Lijian
  • Zhang, Wei
  • Xiong, Xiong
  • Shi, Lei

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.

Suggested Citation

  • Wei, Lijian & Zhang, Wei & Xiong, Xiong & Shi, Lei, 2015. "Position limit for the CSI 300 stock index futures market," Economic Systems, Elsevier, vol. 39(3), pages 369-389.
  • Handle: RePEc:eee:ecosys:v:39:y:2015:i:3:p:369-389
    DOI: 10.1016/j.ecosys.2015.01.003
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    References listed on IDEAS

    as
    1. Chiarella, Carl & Iori, Giulia, 2009. "The impact of heterogeneous trading rules on the limit order book and order flows," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 525-537.
    2. Menkhoff, Lukas & Osler, Carol L. & Schmeling, Maik, 2010. "Limit-order submission strategies under asymmetric information," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2665-2677, November.
    3. Kumar, Praveen & Seppi, Duane J, 1992. " Futures Manipulation with "Cash Settlement."," Journal of Finance, American Finance Association, vol. 47(4), pages 1485-1502, September.
    4. Dongmin Kong & Maobin Wang, 2014. "The Manipulator's Poker: Order-Based Manipulation in the Chinese Stock Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(2), pages 73-98.
    5. Hans R. Dutt & Lawrence E. Harris, 2005. "Position limits for cash‐settled derivative contracts," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(10), pages 945-965, October.
    6. Theissen, Erik, 2000. "Market structure, informational efficiency and liquidity: An experimental comparison of auction and dealer markets," Journal of Financial Markets, Elsevier, vol. 3(4), pages 333-363, November.
    7. Goettler, Ronald L. & Parlour, Christine A. & Rajan, Uday, 2009. "Informed traders and limit order markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 67-87, July.
    8. repec:wsi:ijitdm:v:10:y:2011:i:03:n:s0219622011004464 is not listed on IDEAS
    9. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
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    More about this item

    Keywords

    Position limit; Stock index futures; Agent-based modeling; Market quality;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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