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Wang, J., Zhong, H., Yu, Z. Inter-Variety Equilibrium of Chinese Treasury Futures. Credit and Capital Markets – Kredit und Kapital, 55(2), 261-290. https://doi.org/10.3790/ccm.55.2.261
Wang, Jinzhong; Zhong, Hong and Yu, Zhenjie "Inter-Variety Equilibrium of Chinese Treasury Futures" Credit and Capital Markets – Kredit und Kapital 55.2, 2022, 261-290. https://doi.org/10.3790/ccm.55.2.261
Wang, Jinzhong/Zhong, Hong/Yu, Zhenjie (2022): Inter-Variety Equilibrium of Chinese Treasury Futures, in: Credit and Capital Markets – Kredit und Kapital, vol. 55, iss. 2, 261-290, [online] https://doi.org/10.3790/ccm.55.2.261
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Inter-Variety Equilibrium of Chinese Treasury Futures

Wang, Jinzhong | Zhong, Hong | Yu, Zhenjie

Credit and Capital Markets – Kredit und Kapital, Vol. 55 (2022), Iss. 2 : pp. 261–290

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.55.2.261
Language
English
Pages
30
Keywords

Author Details

Prof. Jinzhong Wang, Southwestern University of Finance and Economics, 555 Liu­tai Avenue, Wenjiang District, Chengdu, Sichuan.

Hong Zhong, Southwestern University of Finance and Economics, 555 Liutai Avenue, Wenjiang District, Chengdu, Sichuan.

Zhenjie Yu, Southwestern University of Finance and Economics, 555 Liutai Avenue, Wenjiang District, Chengdu, Sichuan.

References

  1. Butterworth, D./Holmes, P. (2005): The Hedging Effectiveness of UK Stock Index Futures Contracts Using an Extended Mean Gini Approach: Evidence for the FTSE 100 and FTSE Mid250 Contracts, Multinational Finance Journal, Vol. 9(3/4), 131–160.  Google Scholar
  2. Chen, J. M./Yang, J. F. (2014): Empirical Study on Futures-Spot Arbitrage of China’s Treasury Futures at Present Stage, Zhejiang Finance, Vol. 3, 48–52.  Google Scholar
  3. Chen, J. Y. (2020): Empirical Study on Futures-Spot Arbitrage and Hedging Strategies of Treasury Futures, Modern Business, Vol. 25, 138–139.  Google Scholar
  4. Chen, R./Ge, J. (2015): On the Pricing of Treasury Bond Futures: Principles and a Literature Review, Journal of Xiamen University (Arts & Social Sciences),Vol. 1, 33–40.  Google Scholar
  5. Cornell, B./ French, K. R. (1983): The pricing of stock index futures, Journal of Futures Markets (pre-1986),Vol. 3(1), 1–14.  Google Scholar
  6. Cox, J. C./Ingersoll, J. E., Jr./Ross, S. A. (1981): A re-examination of traditional hypotheses about the term structure of interest rates, Journal of Finance, Vol. 36(4), 769–799.  Google Scholar
  7. Cui, L./Huang, K./Cai, H. J. (2015): Application of a TGARCH-wavelet neural network to arbitrage trading in the metal futures market in China, Quantitative Finance, Vol. 15(2), 371–384.  Google Scholar
  8. Elton, E. J./Gruber, M. J./Rentzler, J. (1984): Intra-day tests of the efficiency of the Treasury bill futures market, Review of Economics and Statistics, 129–137.  Google Scholar
  9. Emery, G. W./Liu, Q. (2002): An analysis of the relationship between electricity and natural-gas futures prices, Journal of Futures Markets: Futures, Options, and Other Derivative Products, Vol. 22(2), 95–122.  Google Scholar
  10. Fang, Y. X./Zheng, X. (2014): Study on arbitrage strategies based on China’s Treasury futures restart data, Price: Theory & Practice, Vol. 11, 83–85.  Google Scholar
  11. Figlewski, S. (1984): Hedging performance and basis risk in stock index futures, Journal of Finance, Vol. 39(3), 657–669.  Google Scholar
  12. Haigh, M. S./Holt, M T. (2002): Crack spread hedging: accounting for time-varying volatility spillovers in the energy futures markets, Journal of Applied Econometrics, Vol. 17(3), 269–289.  Google Scholar
  13. Hemler, M. L. (1990): The quality delivery option in Treasury bond futures contracts, Journal of Finance, Vol. 45(5), 1565–1586.  Google Scholar
  14. Hou, Y. H. (2018): Equilibrium relationship and arbitrage opportunity between five-year and ten-year treasury bond futures in China. Southwestern University of Finance and Economics.  Google Scholar
  15. Jiang, R. J./Wang, L. M. (2020): Empirical analysis on statistical arbitrage based on China’s different futures markets, Statistics & Decision, Vol. 36(3), 131–135.  Google Scholar
  16. Kim, A. (2015): Does futures speculation destabilize commodity markets?, Journal of Futures Markets, Vol. 35(8), 696–714.  Google Scholar
  17. Kolb, R. W./Chiang, R. (1982): Duration, immunization, and hedging with interest rate futures, Journal of Financial Research, Vol. 5(2), 161–170.  Google Scholar
  18. Li, J. (2019): Empirical study on futures-spot arbitrage opportunities of China’s Treasury futures, Fujian Quality Management, Vol. 15, 11–111.  Google Scholar
  19. Li, S./Bao, Y./Peng, C./Zhao, Y. L. (2019): Pricing of government bond futures embedded quality option and timing option, Journal of Systems Science and Mathematical Sciences, Vol. 3, 341–352.  Google Scholar
  20. Liu, C./Wang, F./Liu, X. D./Liu, L. (2015): Study on arbitrage, hedging and investment strategies of Treasury futures, Communication of Finance and Accounting, Vol. 27, 11–113.  Google Scholar
  21. Liu, W. W. (2019): Research on the cross-breed arbitrage strategy of Treasury bonds, Shanxi University of Finance and Economics.  Google Scholar
  22. Luo, X. L./Li, Y. Z./Rao, H. H. (2003): The application of carry-cost theory to the pricing of financial futures, Journal of Central South University (Social Science Edition), Vol. 9(6), 784–787.  Google Scholar
  23. Miao, Y./Zhu, J. M. (2019): Empirical study of arbitrage strategy on Hushen 300 Index futures base on GARCH, Journal of Beijing Institute of Graphic Communication, Vol. 27(5), 77–80.  Google Scholar
  24. Mitchell, J. B. (2007): Soybean crush spread arbitrage: Trading strategies and market efficiency. Available at SSRN 987507.  Google Scholar
  25. Peng, J. F. (2010): Research about statistical arbitrage on futures: Based on soybean, soybean meal and soybean oil futures, Shandong University.  Google Scholar
  26. Poole, W. (1978): Using T-bill futures to gauge interest rate expectations, Economic Review, (Spr), 7–19.  Google Scholar
  27. Qin, J. J. (2014): Empirical study of pricing and arbitrage in Treasury bond future market, Shanghai Jiao Tong University.  Google Scholar
  28. Rendleman, R. J., Jr./Carabini, C. E. (1979): The efficiency of the Treasury bill futures market, Journal of Finance, Vol. 34(4), 895–914.  Google Scholar
  29. Simon, D. P. (1999): The soybean crush spread: Empirical evidence and trading strategies, Journal of Futures Markets: Futures, Options, and Other Derivative Products, Vol. 19(3), 271–289.  Google Scholar
  30. Sun, Z. Y. (2021): Research on the strategy of cross variety arbitrage of Treasury bond futures based on AR-GARCH model, Northwest Normal University.  Google Scholar
  31. Tse, Y. K. (1995): Lead-lag relationship between spot index and futures price of the Nikkei stock average, Journal of Forecasting,Vol. 14(7), 553–563.  Google Scholar
  32. Tse, Y. (1999): Price discovery and volatility spillovers in the DJIA index and futures markets, Journal of Futures Markets. Vol. 19(8), 911–930.  Google Scholar
  33. Wahab, M./Cohn, R./Lashgari, M. (1994): The gold-silver spread: Integration, cointegration, predictability, and ex-ante arbitrage, Journal of Futures Markets, Vol. 14(6), 709–756.  Google Scholar
  34. Wang, J. Z./Hu, X. F. (2015): Research on the effectiveness of Chinese Treasury bond futures market, Economic Review, Vol. 6, 55–68.  Google Scholar
  35. Wang, L./Feng, Q. N. (2015): The interest rate liberalization, the price-discovery and risk-aversion functions of Treasury bond future, Finance Forum, Vol. 20(4), 36–45.  Google Scholar
  36. Wang, W./Yao, Y. (2015): The application of Treasury futures in commercial bank duration gap management., Shanghai Finance, Vol. 4, 91–95.  Google Scholar
  37. Wang, Z. (2011): Chinese metal futures arbitrage and risk management research: A case study of SHFE copper and zinc, Zhejiang University.  Google Scholar
  38. Wu, J. T. (2017): Research on arbitrage strategy of Treasury bonds based on high frequency data, Shanxi University of Finance and Economics.  Google Scholar
  39. Yang, Y. J./Chen, S. C. (2018): Study on China’s Treasury bond futures spread based on high-frequency data, Accounting and Finance, Vol. 2, 1–6.  Google Scholar
  40. Yin, X. M./Sun, T./Xu, Z. D. (2008): Feasibility study on cross-commodity arbitrage between palm oil and soybean oil futures on the basis of high frequency data, Rural Economy and Science-Technology, Vol. 8, 84–86.  Google Scholar
  41. Zhang, J. F./Tang, Y. W./Gang, J. H./Fan, L. L. (2019): Price discovery in China’s interest rate markets: Evidence from the Treasury spot, futures, and interest rate swaps markets, Journal of Financial Research, Vol. 1, 19–34.  Google Scholar
  42. Zhang, J. W. (2020): Empirical study on cross-variety arbitrage strategy of commodity futures: Based on iron ore and coke, Modern Business, Vol. 28, 90–92.  Google Scholar
  43. Zhou, L. (2017): Study on commodity futures-spot arbitrage based on GARCH model, Journal of Jilin Business and Technology College, Vol. 33(6), 78–84.  Google Scholar
  44. Zhu, L. R./Su, X./Zhou, Y. (2015): Empirical study of statistical arbitrage in Chinese future market, Journal of Applied Statistics and Management, Vol. 34(4), 730–740.  Google Scholar
  45. Zou, Z. Y./Chen, H. C./Li, X. (2019): An empirical study on the asymmetry of soybean futures price fluctuation, Journal of Shaoguan University, Vol. 40(1), 88–93.  Google Scholar
  46. Butterworth, D./Holmes, P. (2005): The Hedging Effectiveness of UK Stock Index Futures Contracts Using an Extended Mean Gini Approach: Evidence for the FTSE 100 and FTSE Mid250 Contracts, Multinational Finance Journal, Vol. 9(3/4), 131–160.  Google Scholar
  47. Chen, J. M./Yang, J. F. (2014): Empirical Study on Futures-Spot Arbitrage of China’s Treasury Futures at Present Stage, Zhejiang Finance, Vol. 3, 48–52.  Google Scholar
  48. Chen, J. Y. (2020): Empirical Study on Futures-Spot Arbitrage and Hedging Strategies of Treasury Futures, Modern Business, Vol. 25, 138–139.  Google Scholar
  49. Chen, R./Ge, J. (2015): On the Pricing of Treasury Bond Futures: Principles and a Literature Review, Journal of Xiamen University (Arts & Social Sciences),Vol. 1, 33–40.  Google Scholar
  50. Cornell, B./ French, K. R. (1983): The pricing of stock index futures, Journal of Futures Markets (pre-1986),Vol. 3(1), 1–14.  Google Scholar
  51. Cox, J. C./Ingersoll, J. E., Jr./Ross, S. A. (1981): A re-examination of traditional hypotheses about the term structure of interest rates, Journal of Finance, Vol. 36(4), 769–799.  Google Scholar
  52. Cui, L./Huang, K./Cai, H. J. (2015): Application of a TGARCH-wavelet neural network to arbitrage trading in the metal futures market in China, Quantitative Finance, Vol. 15(2), 371–384.  Google Scholar
  53. Elton, E. J./Gruber, M. J./Rentzler, J. (1984): Intra-day tests of the efficiency of the Treasury bill futures market, Review of Economics and Statistics, 129–137.  Google Scholar
  54. Emery, G. W./Liu, Q. (2002): An analysis of the relationship between electricity and natural-gas futures prices, Journal of Futures Markets: Futures, Options, and Other Derivative Products, Vol. 22(2), 95–122.  Google Scholar
  55. Fang, Y. X./Zheng, X. (2014): Study on arbitrage strategies based on China’s Treasury futures restart data, Price: Theory & Practice, Vol. 11, 83–85.  Google Scholar
  56. Figlewski, S. (1984): Hedging performance and basis risk in stock index futures, Journal of Finance, Vol. 39(3), 657–669.  Google Scholar
  57. Haigh, M. S./Holt, M T. (2002): Crack spread hedging: accounting for time-varying volatility spillovers in the energy futures markets, Journal of Applied Econometrics, Vol. 17(3), 269–289.  Google Scholar
  58. Hemler, M. L. (1990): The quality delivery option in Treasury bond futures contracts, Journal of Finance, Vol. 45(5), 1565–1586.  Google Scholar
  59. Hou, Y. H. (2018): Equilibrium relationship and arbitrage opportunity between five-year and ten-year treasury bond futures in China. Southwestern University of Finance and Economics.  Google Scholar
  60. Jiang, R. J./Wang, L. M. (2020): Empirical analysis on statistical arbitrage based on China’s different futures markets, Statistics & Decision, Vol. 36(3), 131–135.  Google Scholar
  61. Kim, A. (2015): Does futures speculation destabilize commodity markets?, Journal of Futures Markets, Vol. 35(8), 696–714.  Google Scholar
  62. Kolb, R. W./Chiang, R. (1982): Duration, immunization, and hedging with interest rate futures, Journal of Financial Research, Vol. 5(2), 161–170.  Google Scholar
  63. Li, J. (2019): Empirical study on futures-spot arbitrage opportunities of China’s Treasury futures, Fujian Quality Management, Vol. 15, 11–111.  Google Scholar
  64. Li, S./Bao, Y./Peng, C./Zhao, Y. L. (2019): Pricing of government bond futures embedded quality option and timing option, Journal of Systems Science and Mathematical Sciences, Vol. 3, 341–352.  Google Scholar
  65. Liu, C./Wang, F./Liu, X. D./Liu, L. (2015): Study on arbitrage, hedging and investment strategies of Treasury futures, Communication of Finance and Accounting, Vol. 27, 11–113.  Google Scholar
  66. Liu, W. W. (2019): Research on the cross-breed arbitrage strategy of Treasury bonds, Shanxi University of Finance and Economics.  Google Scholar
  67. Luo, X. L./Li, Y. Z./Rao, H. H. (2003): The application of carry-cost theory to the pricing of financial futures, Journal of Central South University (Social Science Edition), Vol. 9(6), 784–787.  Google Scholar
  68. Miao, Y./Zhu, J. M. (2019): Empirical study of arbitrage strategy on Hushen 300 Index futures base on GARCH, Journal of Beijing Institute of Graphic Communication, Vol. 27(5), 77–80.  Google Scholar
  69. Mitchell, J. B. (2007): Soybean crush spread arbitrage: Trading strategies and market efficiency. Available at SSRN 987507.  Google Scholar
  70. Peng, J. F. (2010): Research about statistical arbitrage on futures: Based on soybean, soybean meal and soybean oil futures, Shandong University.  Google Scholar
  71. Poole, W. (1978): Using T-bill futures to gauge interest rate expectations, Economic Review, (Spr), 7–19.  Google Scholar
  72. Qin, J. J. (2014): Empirical study of pricing and arbitrage in Treasury bond future market, Shanghai Jiao Tong University.  Google Scholar
  73. Rendleman, R. J., Jr./Carabini, C. E. (1979): The efficiency of the Treasury bill futures market, Journal of Finance, Vol. 34(4), 895–914.  Google Scholar
  74. Simon, D. P. (1999): The soybean crush spread: Empirical evidence and trading strategies, Journal of Futures Markets: Futures, Options, and Other Derivative Products, Vol. 19(3), 271–289.  Google Scholar
  75. Sun, Z. Y. (2021): Research on the strategy of cross variety arbitrage of Treasury bond futures based on AR-GARCH model, Northwest Normal University.  Google Scholar
  76. Tse, Y. K. (1995): Lead-lag relationship between spot index and futures price of the Nikkei stock average, Journal of Forecasting,Vol. 14(7), 553–563.  Google Scholar
  77. Tse, Y. (1999): Price discovery and volatility spillovers in the DJIA index and futures markets, Journal of Futures Markets. Vol. 19(8), 911–930.  Google Scholar
  78. Wahab, M./Cohn, R./Lashgari, M. (1994): The gold-silver spread: Integration, cointegration, predictability, and ex-ante arbitrage, Journal of Futures Markets, Vol. 14(6), 709–756.  Google Scholar
  79. Wang, J. Z./Hu, X. F. (2015): Research on the effectiveness of Chinese Treasury bond futures market, Economic Review, Vol. 6, 55–68.  Google Scholar
  80. Wang, L./Feng, Q. N. (2015): The interest rate liberalization, the price-discovery and risk-aversion functions of Treasury bond future, Finance Forum, Vol. 20(4), 36–45.  Google Scholar
  81. Wang, W./Yao, Y. (2015): The application of Treasury futures in commercial bank duration gap management., Shanghai Finance, Vol. 4, 91–95.  Google Scholar
  82. Wang, Z. (2011): Chinese metal futures arbitrage and risk management research: A case study of SHFE copper and zinc, Zhejiang University.  Google Scholar
  83. Wu, J. T. (2017): Research on arbitrage strategy of Treasury bonds based on high frequency data, Shanxi University of Finance and Economics.  Google Scholar
  84. Yang, Y. J./Chen, S. C. (2018): Study on China’s Treasury bond futures spread based on high-frequency data, Accounting and Finance, Vol. 2, 1–6.  Google Scholar
  85. Yin, X. M./Sun, T./Xu, Z. D. (2008): Feasibility study on cross-commodity arbitrage between palm oil and soybean oil futures on the basis of high frequency data, Rural Economy and Science-Technology, Vol. 8, 84–86.  Google Scholar
  86. Zhang, J. F./Tang, Y. W./Gang, J. H./Fan, L. L. (2019): Price discovery in China’s interest rate markets: Evidence from the Treasury spot, futures, and interest rate swaps markets, Journal of Financial Research, Vol. 1, 19–34.  Google Scholar
  87. Zhang, J. W. (2020): Empirical study on cross-variety arbitrage strategy of commodity futures: Based on iron ore and coke, Modern Business, Vol. 28, 90–92.  Google Scholar
  88. Zhou, L. (2017): Study on commodity futures-spot arbitrage based on GARCH model, Journal of Jilin Business and Technology College, Vol. 33(6), 78–84.  Google Scholar
  89. Zhu, L. R./Su, X./Zhou, Y. (2015): Empirical study of statistical arbitrage in Chinese future market, Journal of Applied Statistics and Management, Vol. 34(4), 730–740.  Google Scholar
  90. Zou, Z. Y./Chen, H. C./Li, X. (2019): An empirical study on the asymmetry of soybean futures price fluctuation, Journal of Shaoguan University, Vol. 40(1), 88–93.  Google Scholar

Abstract

Treasury futures, important tools in interest risk management, need to maintain price equilibrium between different varieties. In this paper, we conduct research on ten-, five-, and two-year Treasury futures in China’s futures market. The auto-regression model is used to fit and predict the spot yield, the CTD (cheapest to deliver) price is used in valuing Treasury futures, and the transaction cost and market friction are considered in building the arbitrage-free spread interval. By comparing the amount of deviation and the equilibrium reversion speed, we analyse the inter-variety price equilibrium between Treasury futures. We find that there are many arbitrage opportunities among the three varieties, and the market is not fully efficient. Through further analysis of the pairwise spread relationship of the futures, we conclude that longer operation of the Treasury futures market will lead to higher market efficiency, shorter duration of arbitrage opportunities, and a faster return to equilibrium. The existing literature mainly focuses on the equilibrium relationship between two Treasury futures in statistical terms, but this paper examines the equilibrium relationship between all existing varieties of Treasury futures in China’s market based on pricing, which expands the subject and methods of research on inter-variety equilibrium in Treasury futures.

Table of Contents

Section Title Page Action Price
Jinzhong Wang / Hong Zhong / Zhenjie Yu: Inter-Variety Equilibrium of Chinese Treasury Futures 261
Abstract 261
I. Introduction 261
II. Literature Review 263
III. Data 266
1. Selection of Treasury Futures Contract 266
2. Selection of CTD 267
3. Spot Yield Data 269
IV. Spot Yield Prediction Model 270
V. Arbitrage-Free Equilibrium Spread Models 273
1. Basic Arbitrage-Free Equilibrium Spread Models 273
2. Modification of Arbitrage-Free Equilibrium Spread Models in Reality 275
VI. Empirical Results 278
1. Analysis of the Market Spread Curve 279
2. Analysis of the Extent of Deviation 281
3. Analysis of the Speed of Reversion to Equilibrium 284
4. Comparison of the Three Spreads 285
VII. Conclusion 286
References 287

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