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Rise and Fall of the First Financial Futures Market in China: The Case of Chinese Government Bond Futures
Author(s) -
Chen Chao,
Zhou Zhongguo
Publication year - 2009
Publication title -
china and world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.815
H-Index - 28
eISSN - 1749-124X
pISSN - 1671-2234
DOI - 10.1111/j.1749-124x.2009.01145.x
Subject(s) - futures contract , spread trade , forward market , economics , bond market , bond , financial economics , government bond , volatility (finance) , business , finance , financial system , corporate governance , institutional investor , open end fund
This paper studies the rise and fall of the first financial futures market in China. We compare the characteristics in the Chinese Government bond futures market with those in the US T‐bond futures market. They differ in market design and structure, market governance, margin requirements, position limits, delivery process, and the way in which the settlement price is calculated. Furthermore, with a unique dataset, we show that prior to maturities of government bond futures, traders began to accumulate significant amounts of long positions for several selected contracts without the intention to offset, forcing short position holders to either purchase deliverable bonds or offset futures at highly inflated prices, causing higher market volatility and price disequilibrium in both spot and futures markets. Arbitrage opportunity arises and the market eventually collapses. The lessons learned from the suspension of the Chinese Government bond futures market offer an invaluable learning experience.