Price Discovery Function of Government Bond Futures: Evidence from Chinese 10-Year Treasury Note Markets

Utilizing the data of the futures and spot prices of Chinese 10-year Treasury notes from 2015 to 2022, this paper examines the price discovery mechanism on Chinese Treasury bond markets. We find that there is a significant cointegrating relationship between the futures price and the spot price of Chinese 10-year Treasury notes, and that in this long-run equilibrium the futures price has a one-way predicting effect on the spot price. We also find that the proportions of the variations in the spot price and the futures price explained by a shock or impulse in the futures market is higher in a later period than in a comparable earlier period, indicating that the contribution of the futures market to the price discovery has been increasing gradually. These results suggest that the price discovery function of futures markets is significant and has become more important to market efficiency. Furthermore, the disparities of our 10-year-note results from the previous 5-year-note results indicate that the price discovery function varies across underlying assets.