The impact of stock index futures margin levels on market quality

Mengyao Gong, Ting Feng, Zhongshan Liu and Yuandong Gao

Finance Research Letters, 2024, vol. 70, issue C

Abstract: We examine the impact of margin levels on market quality in the China Shanghai–Shenzhen 300 (CSI 300) Stock Index Futures market. Utilizing microstructure theory and the OPOK model, we specifically focus on volatility, liquidity, and effectiveness. Our findings reveal that lowering the margin level for stock index futures reduces capital constraints for both informational and non-informational traders. Furthermore, we show that a reduction in margin levels enhances market liquidity and effectiveness. Improvements in liquidity and effectiveness subsequently reduce market volatility, indicating that a decrease in margin levels does not necessarily increase market risk. Based on these results, we recommend setting margins for stock index futures with comprehensive consideration of their combined effects on volatility, liquidity, and effectiveness.

Keywords: Stock index futures; Margins; Volatility; Liquidity; Effectiveness (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:70:y:2024:i:c:s1544612324013345

DOI: 10.1016/j.frl.2024.106305

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