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Position-Limit Design for the CSI 300 Futures Markets

Lijian Wei, Wei Zhang, Xiong Xiong and Lei Shi ()
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Lijian Wei: Finance Discipline Group, UTS Business School, University of Technology Sydney
Wei Zhang: Tianjin University
Xiong Xiong: Tianjin University

No 349, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

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 (search for similar items in EconPapers)
JEL-codes: C63 D44 G14 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2014-06-01
New Economics Papers: this item is included in nep-cmp, nep-mst and nep-tra
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