Timing Chinese Equity Index Futures Basis with Momentum and Mean Reversion
Summary
The study examines timing the basis between Chinese equity indices and their futures, motivated by persistent futures discounts and uncertainty for market-neutral funds. To reduce the influence of carry components such as rates, dividends, and time to expiry, it constructs an open-interest-weighted futures index and defines an adjusted basis against the spot index.
It tests three signals: spot-index momentum to anticipate basis changes, rolling linear fits to identify mean-reversion around a local trend, and nearest-neighbor cycle analysis to estimate reversals. The study combines the signals with equal weights and predicts direction by majority vote. It reports backtest results for the CSI 300, CSI 500, and SSE 50, including an annualized basis gain for the CSI 300 and an improvement to a hedged alpha portfolio after accounting for trade direction, position, and costs. The supplied text gives limited detail on data, implementation, and robustness, so the reported results should be treated as study-specific evidence rather than a guarantee of performance.
Key ideas
- An open-interest-weighted futures index is used to reduce carry-related effects in the measured basis.
- Spot-index momentum is used to forecast the next period’s basis direction.
- A rolling linear fit provides a local reference for a mean-reversion signal.
- Nearest-neighbor cycle analysis estimates when basis movements may reverse.
- The combined model uses an equal-weight majority vote across three signals.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.