The emotional cost-of-carry: Chinese investor sentiment and equity index futures basis

Song Cao, Ziran Li, Kees G. Koedijk, Xiang Gao*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

7 Downloads (Pure)


Purpose: While the classic futures pricing tool works well for capital markets that are less affected by sentiment, it needs further modification in China's case as retail investors constitute a large portion of the Chinese stock market participants. Their expectations of the rate of return are prone to emotional swings. This paper, therefore, explores the role of investor sentiment in explaining futures basis changes via the channel of implied discount rates. Design/methodology/approach: Using Chinese equity market data from 2010 to 2019, the authors augment the cost-of-carry model for pricing stock index futures by incorporating the investor sentiment factor. This design allows us to estimate the basis in a better way that reflects the relationship between the underlying index price and its futures price. Findings: The authors find strong evidence that the measure of Chinese investor sentiment drives the abnormal fluctuations in the basis of China's stock index futures. Moreover, this driving force turns out to be much less prominent for large-cap stocks, liquid contracting frequencies, regulatory loosening periods and mature markets, further verifying the sentiment argument for basis mispricing. Originality/value: This study contributes to the literature by relying on investor sentiment measures to explain the persistent discount anomaly of index futures basis in China. This finding is of great importance for Chinese investors with the intention to implement arbitrage, hedging and speculation strategies.

Original languageEnglish
Pages (from-to)451-476
Number of pages26
JournalChina Finance Review International
Issue number3
Early online date4 Jan 2022
Publication statusPublished - 19 Jul 2022

Bibliographical note

Publisher Copyright:
© 2021, Emerald Publishing Limited.


  • Basis
  • Cost-of-carry model
  • Equity index futures
  • Investor sentiment

Cite this