Study on the Mispricing of Index Futures with Stochastic Analysis: Evidence from Chinese CSI300 Index Futures∗

Liangzong Ma, School of Economics, Peking University
Shijian Liu, Duke University
Shuaiyu Jiang, The Chinese University of Hong Kong, Shenzhen
Volume 1 nos.1 December 2022 ISSN 2755-3272

Keywords

CSI300, Stock Index Futures, Cost-of-Carry, Pricing Bias

Abstract

This paper analyzes the pricing of CSI300 stock index futures under a modified Cost-of-Carry framework. We discover a pricing bias in both long-term and short-term contracts which changes consistently over time in both average magnitude and volatility. We adopt a Brownian motion model with drift term to approximate the magnitude and volatility of the bias, and empirically analyze the factors that may affect this pattern. Generally, the bias is affected by market trading volume, investor sentiments, and futures related features. The study provides new evidence for the origin of mispricing in the Chinese stock index futures market and complements conclusions in previous literature.