The impact of the CSI 300 stock index futures: Positive feedback trading and autocorrelation of stock returns

- Introducing index futures intensifies positive feedback trading in spot market.
- Positive feedback trading is present in index futures market.
- Index futures market reduces volatility of spot market.
- Positive feedback trading is more intense during market declines.
- Introducing index futures tends to impair pricing efficiency of spot market.

This study examines the impact of the CSI 300 index futures on the underlying spot market in terms of feedback trading model. A univariate AR-GJR-GARCH-M model and a bivariate VECM-GARCH-M model are employed for the analysis. Our research reveals that the CSI 300 stock index futures market intensifies positive feedback trading in the underlying spot market which is detrimental to the informational efficiency. Furthermore, the CSI 300 stock index futures market attracts positive feedback trading in itself and this may destabilize asset prices of the underlying spot index through the index arbitrage process.