2011 International Conference on Management Science & Engineering (18th)
September 13-15, 2011 Rome, Italy
Empirical Research on the Day-of-the-week Liquidity Patterns
in Chinese Stock Index Futures Market
YE Qiang 1ˈWANG Xiao-lin1ˈTONG Wei-min2ˈLIU Wen-cai2ˈKOU Yi1
1 School of Management, Harbin Institute of Technology, P.R.China, 150001
2 China Financial Futures Exchange, P.R.China, P.R.China, 200122
Abstract: This paper examines the day-of-the-week volatile markets-but also the most speculative investors
liquidity effect of CSI300 Stock Index Futures. Empirical in markets.
results show that the day-of-the-week liquidity pattern The research of China mainland's first financial
exhibits a reverse V-shaped for the CSI300 index futures. futures-CSI300 index futures’ liquidity operation
The regression analysis results consistent with previous characteristics should be of interest to regulators,
analysis also demonstrate the day-of-the-week liquidity practitioners and researchers alike. This sudy has a dual
have statistically significant effect. Furthermore, this focus. First, it examines the day-of-the-week effect of
paper investigates the influencing factors to stock index liquidity in the stock index futures market around the
futures liquidity and give some recommendations for the introduction of the CSI 300 index futures contract.
trading regime of Chinese Stock Index Futures market. Second, the paper furthers previous research concerning
Keywords: liquidity, the day-of-the-week pattern, the influencing factors to stock index futures liquidity.
Chinese stock index futures market
2 Literature review
1 Introduction
Market liquidity is important as one of the main
With China Financial Futures Exchange launching functions of markets is to show how the prices reflect the
the Chinese mainland's first stock index futures on the market expectations, in other words, markets are efficient.
16th April 2010, stock index futures studies is becoming According to the efficient market hypothesis (EMH)
research subject of the theorists and practitioners. Prior market prices reflect the information available to
literatures have focused on index futures in the United investors, hence it is not worth spending time with
States, Europe, Japan, Korea and China's Hong Kong and searching for new pieces of information, that is we can
Taiwan markets, empirical analysis for China's first rely on prices, and furthermore, price changes are are
financial futures-CSI300 index futures is seriously generally due to the new information. If the theory holds
insufficient, the research of its operation characteristics true daily price returns will be independent and normally
is relatively scarce. The shortage of operational distributed. The assumption of EMH lies behind
characteristics analysis is part of the Shanghai and numerous financial models, and is in strongly tied to
Shenzhen 300 subject to a late and relatively scarce liquidity as on a market with low liquidity prices can
published. easily be shifted by trading, “noise” may be added to the
The China Financial Futures Exchange set the base price formation process. Accordingly, a liquid market
value for the beginning of trade in China's first stock will become more efficient, as price changes stemming
index futures contracts, due for official launch on the from low liquidity will not be present. Furthermore,
16the April 2010 at 3,399 points for all four contracts. liquidity is essential, as the costs of trading are loss in a
The contracts are for May, June, September and liquid market, therefore a lower transaction cost if
December. Investers must make a minimum deposit of required. This makes it clear why it can be a key
Rmb 500,000 to open a trading account, and prove they question to market participants to compare the liquidity
have completed at least 20 mock stock index futures of different assets, and to quantify the indirect costs.
trades or executed at least 10 commodity futures trades Measuring liquidity is a complex issue as a single
in the past three years. They also must pay cash deposits measure is not capable of expressing the various
equivalent to 15 per cent of the contract value for May dimensions of liquidity and to gauge the indirect costs of
and June contracts and 18 per cent for longer-term trading.
contracts. Foreigners are not allowed to trade index Weekday effect refers to the phenomenon that
futures. The restrictions are mostly designed to keep out variables of the financial market in a day of the week
the small retail investors who are the lifeblood of China’s was obviously different from other trading days. The
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978-1-4577-1888-5/11/$26.00 ©2011 IEEE
research about weekday effect starts from Cross, his lagged effect of trading volume on absolute returns for
findings show that: the average return of SP500 Index is the Greek blue chip index(FTSE/ASE20). However their
relatively high on friday and relatively low on Monday in analysis does not reveal any significant relationship
a week. Many scholars have further studied weekday between trading volume and absolute returns for the
effect of daily return on the stock market after his study. mid-cap index (FTSE/ASE40).
The day-of-the-week effect of liquidity in stock index
futures market refers to futures contracts liquidity show 3 Methodology
the different characteristics during different transaction
time of a week. Researches investigating the inter-day 3.1 Data collection
effect are mainly focused on trading activities of the This paper focus on CSI300 index futures,
market (Kamara, 1997; Chordia et al., 2001), or the investigate the existence of such anomalies calendar
conditional mean and variance of stock returns ( Chang effect, the day of the week effect. The CSI300 index
et al., 1993; Choudhry, T., 2000). measures the performance of 300 largest Chinese
Earlier researchers have investigated the existence companies in terms of order book volume and market
of intraday periodicities in trading volume, returns, capitalization. We obtain time stamped intra-day
volatility, and bid-ask spreads, in both equity and foreign transaction data including the bid and ask quotes at the
exchange markets. Many earlier studies demonstrated time of the trade for the CSI300 index futures. The data
intraday U-shaped pattern in return variance by Harris is from the market record of Shanghai-based China
(1986), McInish and Wood (1990) and Jain and Joh Financial Futures Exchange which contains transaction
(1988). Brock and Kleidon (1992) report that bid-ask price, trading volume, and the bid and ask quote for
spreads tend to be higher at the beginning and the end of each 5-minute period. The analysis covers the period
the trading day, thus follow a U-shaped pattern during from May 4, 2010 to March 21, 2011, including 220
the day. There are different explanations for intraday trading days, 6 872 649 market records.
regularities observed in key financial markets’ variables.
Admati and Pfleiderer (1988) relate the U-shaped (also 3.2 Model building
sometimes referred as reverse J shaped) pattern in The notion of market liquidity is too complex for a
volume and volatility with the private information. They single measure to grasp. Numerous indices are available
argue that high trading volume in a particular time for the market participants, each of these measures
interval reveals the presence of asymmetric information focusing on different aspects of the notion. Prior to the
as noise traders camouflage the activities of the informed thorough analysis of market liquidity the dimensions of
traders, and this increases the return volatility. Therefore, liquidity should be defined.
volume and volatility move in the same direction. While The literature identifies the following dimensions:
Brock and Kleiden (1992) argue that trading halts and width, depth, tightness, resiliency and immediacy. The
different trading strategies at the open and close of the first three refer to as the static dimensions (Kyle, 1985),
markets form these volume patterns. High trading while the latter two to the dynamic dimensions (Harris,
volume is associated with the high liquidity demand at 1990). Above all, part of the literature mentions the
the open and close of the trading day in their model, and diversity of the market as a dimension of liquidity.
bid-ask spreads will also exhibit a U-shaped pattern (Kutas –Végh, 2005).
during the day. The indices measuring one dimension of liquidity
Many recent papers have examined the empirical are called one-dimensional measures, while the indices
relationship between price volatility and trading volume. covering several dimensions of liquidity are referred to
Jegadeesh and Subrahmanyam (1993) examine the effect as multi-dimensional measures (Michaletzky, 2010).
of the introduction of the S&P 500 futures contract on However, no index exists that comprehends all of the
the bid-ask spreads in the cash market. Darrat et al. dimensions. As each of the liquidity measures focus on
(2003) report that high trading volume causes high return different aspects and dimensions of liquidity they do not
volatility in accordance with SIAH hypothesis with show the same for the liquidity of the market.
intraday data for 30 stocks in the Dow Jones Industrial The width and depth are widely used because of
Average . Darrat et al. (2007) test for intraday lead-lag their typical and visually discribing market liquidity
relationship between trading volume and volatility of conditions, so in this paper we select width and depth as
large and small NYSE stocks in two cases: with and the liquidity Indicators. Variable calculation methods are
without identifiable public news. Their results generally as follows:
support SIAH which assumes that the information comes
m
in sequence and thus traders react to this new
information sequentially, suggesting that in the presence ¦n 1
SP n
(1)
Width
of public information, volume and volatility may m
Granger-cause each other. Floros and Vougas (2007) m
examine the relationship between daily trading volume
and return volatility in the Greek stock index futures
¦n 1
BDn
(2)
D e p th
market. They find evidence of contemporaneous and m
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Where: stock index futures market. As what we can see from
SPn represents bid-ask spread of each trading day. Figure 1, stock index futures liquidity exhibits the
BDn represents best depth of each trading day. highest point on Tuesday while the lowest point on
m represents the sum of all trading days Friday.
4 Empirical research of liquidity patterns 4.2 Empirical results
In this study, in order to examin whether there are
4.1The day-of-the-week liquidity patterns significant liquidity differences in Chinese stock index
In this paper, we investigates whether there are futures market of each trading day in a week, we
significant liquidity differences in each trading day of the primarily calculate each single trading day's index of
week, using of liquidity indicators-width and depth. CSI300 lead month contract. Since the independent
The week is divided into 5 trading days from Monday to variables of the model were complete collinearity, we
Friday, then respectively calculated average liquidity made five tests excluding the impact of one independent
indicators of each trading day. Finally in order to get variable on each test. Finally, we examine the significant
average liquidity indicator of the whole market in the differences of each trading day in the week by the
trading day, we averaged this mean value of all sample in regression tests based on equation (3).
trading day. 5
Figure 1 exhibits the day of the week liquidity
patterns of the CSI300 index. A first glance at Figure 1
WLI i ¦D D
i 1
i i D j D j Hˈ j 1, 2.....5 (3)
reveals the “V” shapes of spread during the day
compared to “U” shape in most stock markets. On where WLIi is the variable of average liquidity. D1 ǃD2ǃ
opposite, depth exhibits a crude reverse V-shaped . ǃD5 represent (0,1) dummy variables corresponding
Obviously, the width and depth index was negatively to MondayǃTuesdayǃ ǃFriday. For days of the week,
correlated. Stock Index Futures liquidity exhibits the D1 equals 1 on Mondays and 0 otherwise, D2 equals 1 on
highest point on Tuesday when the bid-ask spread get get Tuesdays and 0 otherwise, D3 equals 1 on Wednesdays
its lowest point 0.3522, while the depth get its highest and 0 otherwise, D4 equals 1 on Thursdays and 0
point 20.7601. From Wednesday to Thursday, with the otherwise, and D5 equals 1 on Fridays and 0 otherwise.
spread increasing and the depth decreasing, market Significant positive coefficients on D1, D2,D3, D4 or D5
liquidity continuous decline, finally reach the lowest indicate larger values in the variable of average liquidity
point on Friday. for that day than the average across the rest of the week.
This paper infer that market closure perhaps being Regression coefficient i represents the mean value of
an important factor of the day-of-the-week liquidity liquidity indicators of each trading day in a week. Table
patterns in stock index future market. The information 1 shows the regression results of inter-day liquidity
accumulated during market closure, result in asymmetric effect.
information among stock index futures traders. So most Table 1 reports coefficient estimates of equation (3)
traders would like to trade with caution on Monday. which shows significantly higher liquidity on Tuesdays
While after a day of trading, information has been and lower liquidity on Fridays. It can be concluded that it
effectively released, then tend to be balance between exists significant inter-day liquidity effect on Chinese
traders on Tuesday. Thus the traders have more desire to stock index futures market. The changes trend of stock
transact which increasd the liquidity of the stock index index futures liquidity in a week is not random. There are
futures market. CSI300 contract delivery date is Friday. significant liquidity differences of each trading day in a
So when closing to the delivery date, the traders have week.
less desire to transact which declined the liquidity of the
Trend of depth
Trend of bid-ask spread
0.5 21
0.45 20.5
0.4 20
0.35 19.5
0.3 19
Width
Depth
0.25 ㋏߫ 1 18.5 ㋏߫ 1
0.2 18
0.15 17.5
0.1 17
0.05 16.5
0 16
1 2 3 4 5 1 2 3 4 5
weekday weekday
Fig.1 The day-of-the-week trend of liquidity
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Tab.1 Regression analysis results of inter-day liquidity effect
R2 Mon. Tue. Wed. Thu. Fri.
-0.1196** -0.1239** -0.0835* -0.0469 ---
-0.0728 -0.0770 -0.0367 --- 0.0469
Width 0.52 -0.0361 -0.0404 --- 0.0367 0.0836*
0.0042 --- 0.0404 0.0770 0.1239**
--- -0.0042 0.0361 0.0728 0.1196**
1.9412 3.0008* 1.7801 0.0742 ---
1.8670 2.9266* 1.7059 --- -0.074
Depth 0.30 0.1612 1.2207 --- -1.7059 -1.7801
-1.0596 --- -1.2207 -2.9266* -3.0008*
--- 1.0596 -0.1611 -1.8670 -1.9412
(**Significant at 1%, *Significant at 5%)
Tab.2 Regression analysis results of influencing factors for liquidity
Dependent Variable
Explanation Variable
Width Depth
2
R 0.858 0.797
Vol -1.506** 41.980**
Var 0.184** -4.448**
Price 0.245 -366.513**
Monday -.004 .027
Tuesday -.004 .996*
Wednesday 0.006 .552
Friday -.016 1.431*
**Significant at 1%, *Significant at 5%
5 Analysis of influencing factors for liquidity positive relationship between the trading volume and
market depth. It means that the trading volume is
According to the above results, we infer that positively related to stock index futures liquidity. This
perhaps the the day-of-the-week liquidity patterns of finding is consistent with the results reported in Wang
Chinese stock index futures can be caused by trading and Han (2006), who argued that the negative relation
volume(Vol), volatility(Var) and price. In order to between bid-ask spreads and trading volume indicates
examin the specific role and significant degree of each that an increase in liquidity (narrowing spreads) will
influencing factor for Chinese stock index futures make it easier for investors to carry out a transaction and
liquidity, we test the following regression model based increase transaction desire of the investors.
on equation (4) . Volatility has a significant and positive impact on
LIQt J 0 J 1Volt J 2Vart J 3 Pr icet bid-ask spread. In contrast volatility has a significant and
negative impact on depth. It reveals that volatility is
4
inversely related with stock index futures liquidity.The
¦ D i dayi ,t H t increased liquidity will reduce the subsequent volatility,
i 1 (4) while the higher bid-ask spreads will increase the
where LIQt represents the variables of width and depth, volatility. Volatility reflects different investors'
respectively obtained as described above in equations (1) understanding of the market information and the
and (2). In the regression i is a constant, iǃi and i are differences with the information's quality of each
the coefficients. Dayi is (0,1) dummy variables investor. The higher volatility means that investors are
corresponding to MondayǃTuesdayǃ ǃFriday which uncertain about the future so that the investors do not
exclude Thursday to avoid appearing multicollinearity in desire to provide market liquidity, leading to the increase
the model. For days of the week, D1 equals 1 on of the depth while decrease of the spreads.
Mondays and 0 otherwise, D2 equals 1 on Tuesdays and There is a significant and negative relationship
0 otherwise,......, D5 equals 1 on Fridays and 0 otherwise. between the trading price and the bid-ask spread, while a
H represents the error term. significant and positive relationship between the trading
The estimated coefficients of the equation (4) are price and market depth. It means that the higher price
presented in Table 2. There is a significant and negative will reduce the bid-ask spread, while increase the depth.
relationship between the trading volume and the This finding is consistent with Lu and You (2009), who
contemporaneous bid-ask spread, while a significant and report similar results for futures markets. In addition, the
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