Position-Limit Design for the CSI 300 Futures Markets

29 Pages Posted: 29 May 2014 Last revised: 28 Apr 2016

See all articles by Lijian Wei

Lijian Wei

Business School of Sun Yat-sen Univerisity; Financial Research Network (FIRN)

Wei Zhang

Tianjin University - College of Management and Economics

Xiong Xiong

College of Management and Economics and China Center for Social Computing and Analytics

Lei Shi

Macquarie University; Financial Research Network (FIRN)

Date Written: May 27, 2014

Abstract

The aim of this paper is to find the optimal level of position limit for the Chinese Stock Index (CSI) 300 futures market. A small position limit helps to prevent price manipulations in the spot market, thus able to keep the magnitude of instantaneous price changes within policy makers' tolerance range. However, setting the position limit too small may also have negative effects on market quality. We propose an artificial limit order market with heterogeneous and interacting agents to examine the impact of different levels of position limit on market quality, which is measured by liquidity, return volatility, efficiency of information dissemination and trading welfare. The simulation model is based on realistic trading mechanism, investor structure and order submission behavior observed in the CSI 300 futures market. Our results show that based on the liquidity condition in September 2010, raising the position limit from 100 to 300 can significantly improve market quality and at the same time keep maximum absolute price change per 5 seconds under the 2% tolerance level. However, the improvement becomes only marginal when further increasing the position limit beyond 300. Therefore, we believe that raising the position limit a moderate level can enhance the functionality of the CSI 300 futures market, which benefits the development of the Chinese financial system.

Keywords: Position limit, stock index futures, agent-based modeling, market quality

JEL Classification: G14, C63, D44

Suggested Citation

Wei, Lijian and Zhang, Wei and Xiong, Xiong and Shi, Lei, Position-Limit Design for the CSI 300 Futures Markets (May 27, 2014). Economic Systems, Vol. 39, 2015, Available at SSRN: https://ssrn.com/abstract=2442600 or http://dx.doi.org/10.2139/ssrn.2442600

Lijian Wei (Contact Author)

Business School of Sun Yat-sen Univerisity ( email )

Haizhu District
Guangzhou, Guangdong
China
+86 20 84110551 (Phone)

HOME PAGE: http://bus.sysu.edu.cn/Teacher/ShowTeacher.aspx?tid=338

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Wei Zhang

Tianjin University - College of Management and Economics ( email )

Tianjin
China

Xiong Xiong

College of Management and Economics and China Center for Social Computing and Analytics ( email )

92, Weijin Road
Nankai District
Tianjin, Tianjin 300072
China

Lei Shi

Macquarie University ( email )

New South Wales 2109
Australia
+612 98508478 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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