Economic Modelling 49 (2015) 344–353

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Economic Modelling

journal homepage: www.elsevier.com/locate/ecmod

Risk estimation of CSI 300 index spot and futures in China from a
new perspective
Yuan-Yuan Suo a, Dong-Hua Wang a,b,⁎, Sai-Ping Li c
a
School of Business, East China University of Science and Technology, Shanghai 200237, China
b
Research Center for Econophysics, East China University of Science and Technology, Shanghai 200237, China
c
Institute of Physics, Academia Sinica, Nankang, Taipei 115, Taiwan

a r t i c l e i n f o a b s t r a c t

Article history: We investigate the statistical behavior and application in risk estimation of recurrence intervals between high-
Accepted 31 May 2015 frequency returns that are either larger than a given positive threshold or smaller than a negative threshold
Available online xxxx for the stock index and stock index futures markets in China. By studying the probability density function of
recurrence intervals, we find symmetric profiles for both the positive and negative occurrence thresholds,
Keywords:
which can be fitted with stretched exponential functions. The probability density function further scales with
CSI 300 index
Recurrence interval
the mean interval as the unified functional form for different thresholds. We further study the dependence of
Probability distribution the conditional probability density function and the scaled mean condition recurrence interval on the previous
Memory effect recurrence interval, and demonstrate the existence of short memory in recurrence intervals. The result from
Risk estimation detrended fluctuation analysis exhibits long-term correlations, where the detrended fluctuation function decays
as an exponential function, with an exponent between 0.5 and 1. Based on the results of the analysis of recurrence
intervals, we construct a hazard function and define a loss probability in order to evaluate risk in financial
markets. To our surprise, a crossover is found in the loss probability plot of the stock index and its futures market,
which sheds light on the issue of value at risk (VaR) overestimation (underestimation) based on recurrence
interval analysis of complex financial markets. The study would enable one to improve risk estimation and is
useful for management of risks in financial markets.
© 2015 Elsevier B.V. All rights reserved.

1. Introduction
Since the introduction of stock index futures trading, extensive
research has been devoted to the question of whether index futures
trading contributes to the risk management of the underlying stock
markets in terms of hedging (Lafuente and Novales, 2003; Lee, 2010;
Nguyen, 2014; Park and S. L. N., 1995; Wang et al., 2013). However,
due to the extreme events that occur more frequent than Gaussian
(Bunde et al., 2002; Derrida et al., 1996; Sornette, 2003) fluctuations, re-
vealing the characteristics of big losses, it is impossible for the investors
to be in a full-hedging state all the time. Therefore, quantifying the
regime of large and unpredictable fluctuations in the financial markets
is important both for understanding the present and predicting the pos-
sibilities of future disasters. The importance of understanding financial
market behaviors from new perspectives urges many researchers from
the field of economics, econometrics and mathematics to seek new
ideas from other fields such as physics, which recently created a new in-
terdisciplinary field of econophysics (Chen and Li, 2012; Mantegna and
⁎ Corresponding author at: 130 Meilong Road, P.O. Box 114, School of Business, East
China University of Science and Technology, Shanghai 200237, China. Tel.: + 86 21
64253507.
E-mail address: dhwang@ecust.edu.cn (D.-H. Wang).
Stanley, 2000). In this study, we adopt the recurrence interval analysis
to discuss the behaviors of the spot and futures returns of the CSI 300
stock index in China.
Recurrence interval, also known as return interval or interspike
interval, is the time interval between two consecutive events above
(or below) some threshold q (Mcfadden, 1956). This is related to a
well-established technique in statistical mechanics popularly referred
to as “first passage statistics” or “persistence”(Majumdar, 1999). The
method developed to analyze recurrence intervals in time series has
been applied to many different areas, such as earthquakes (Livina
et al., 2005), climate (Bunde et al., 2004, 2005), statistical models
(Derrida et al., 1994) and heartbeat in medicine science (Bogachev
et al., 2009). The idea of recurrence interval analysis is to predict
catastrophic events like floods, droughts or stock crisis by using the
laws of small fluctuations for the reason that we can find some scaling
properties in different levels of the entire data set, which effectively
solves the problem of insufficient data from extreme fluctuations
(Chattopadhyay and Burroughs, 2007).The recurrence intervals
between volatilities have been carefully studied (Cont, 2001; Engle
and Patton, 2001; Kaizoji and Kaizoji, 2004; Lee et al., 2006; Qiu et al.,
2008; Ren et al., 2009a,b; Tseng and Li, 2011; Wang et al., 2006, 2007;
Xie et al., 2014; Yamasaki et al., 2005). The volatility v(t) can be defined
as the absolute value of the logarithm yields at time t, namely, v(t) =

http://dx.doi.org/10.1016/j.econmod.2015.05.011
0264-9993/© 2015 Elsevier B.V. All rights reserved.
 Y.-Y. Suo et al. / Economic Modelling 49 (2015) 344–353
|lnp(t) − lnp(t − Δt)| where p(t) is the price at time t. Yamasaki et al.
(2005) studied the probability distribution of the recurrence interval
between the daily volatilities of the stocks and currencies price changes
in the USA, and indeed find a scaling behavior and long-term correla-
tions. Wang et al. (2007, 2006)further tested this newly discovered
statistical property using daily and intraday samples of stock indices,
stock prices, exchange rates, crude oil and gold price in the U.S. financial
market, and the scaling function f(x) can be well-approximated by the
γ and futures markets can help them get the risk-free profits from basis
stretched exponential function f ðxÞ ¼ ατe−ðβτxÞ . Similar scaling and
memory properties of the recurrence interval between volatilities are
also found in the Chinese stock market, and the correlation exponents
γ are different for different thresholds q (Liu et al., 2009; Ren and
Zhou, 2008; Ren et al., 2009a; Xie et al., 2014). The recurrence interval
analysis is also applied to the Japanese and Korean stock markets
(Kaizoji and Kaizoji, 2004; Lee et al., 2006), and their volatility
recurrence interval distributions obey power law decays (Bush and
Chattopadhyay, 2014) of the form f(x) = αx− β (Majumdar et al.,
1996). For the volatility recurrence intervals of both daily and high
frequency data sets from different financial markets, one arrives at
similar conclusions: (1) the distribution of the scaled recurrence inter-
val τ=τ can be approximated by a stretched exponential function or
power–law function, and (2) the sequence of the recurrence interval
has a long-term memory related to the original volatility series.
Subsequently, some researchers also focus on the trading volume,
which is well known as an important variable reflecting the liquidity of
the financial market, based on the recurrence interval analysis.
Podobnik et al. (2009) used the recurrence interval analysis method to
calculate the time intervals between the logarithmic change in trading
volume of the world-wide financial indices and stock prices, and
eventually demonstrated that the average intervals obey a power
law distribution which follows an inverse cubic law. Ren and Zhou
(2010b) investigated the recurrence intervals of trading volume for the
20 liquid Chinese stocks, in which a power–law scaling was found in
the tail of the recurrence interval distribution.
To better understand these scaling features and correlations, the
recurrence interval analysis was further carried out to study the price
returns of different financial products (Bogachev and Bunde, 2009;
Bogachev et al., 2007, 2008; Meng et al., 2012; Ren and Zhou, 2010a;
Yamasaki et al., 2006). Bogachev et al. (2007, 2008) investigated the dis-
tribution of recurrence intervals between large fluctuations exceeding
some thresholds in artificial multifractal data sets with nonlinear
correlations, and observed power–law behaviors which depend on the
threshold value and system size. They further introduced a new risk mea-
surement approach by using a probability function Wq(Δt|t). In the recur-
rence interval analysis (RIA), Wq(Δt|t) is the central quantity for risk
estimation, which is defined as the probability of reoccurrence of certain
type of events at least once in the next Δt units of time, if the last time
such type of events occurred t time units ago. More recently, Bogachev
and Bunde (2009) used the RIA method to study how to improve the es-
timation of VaR, which is probably the best-known risk measure of the
risk of loss in financial markets. Similar to findings in (Bogachev and
Bunde, 2009), power–law tails were found in the distribution of recur-
rence intervals in the high-frequency data sets of (Ren and Zhou,
2010a), which were tested by three goodness-of-fit measures. They fur-
ther applied the RIA to the risk estimation for the Chinese stock markets.
The availability of high-quality financial data leads to significant advance-
ment in modeling and estimating risk.
In this paper, we investigate the recurrence intervals that occur in the
high-frequency data of the CSI 300 index spot and futures markets. There
are several reasons to consider in both the spot and futures indices in this
study. First, from the aspect of policymakers and regulators of China Fi-
nancial Futures Exchange (CFFEX), the volatility of the spot market
tends to play an important role in futures trading. Since the CSI 300
index is the underlying asset of the index futures, many trading rules
and contract specifications are designed which are based on the spot
345
market. Owing to the large fluctuations of the present stock market, the
margin requirement has increased from the initial 8% to 12% of the con-
tract value, where 6% is indeed our target margin. Understanding the be-
havior of price fluctuations in the spot market will help us set the proper
margin of the index futures market. Second, for arbitrageurs who attempt
to profit from price inefficiencies in the market by making simultaneous
trades that offset each other and capturing risk-free profits, understand-
ing the similarities and differences of price changing between the spot
changes. Finally, from the perspective of risk management, previous stud-
ies verified that there exists risk contagion effect in financial markets.
When making assets location in the spot market, one cannot just consider
the spot market risk but neglect the futures market. Therefore, it is mean-
ingful to reveal and compare the similarities and differences of the behav-
ioral properties between the CSI 300 index and futures markets. In our
study here, 1-min high-frequency datasets are used to gain better
statistics.
Our study therefore contributes to the literature in the following per-
spectives. First, to the best of our knowledge, this is the first study to ex-
plore and compare the behavior of recurrence intervals between the
stock index and its futures market in China, even though global currency
markets (Yamasaki et al., 2005), U.S. stock market (Wang et al., 2006,
2007) and Chinese stock markets (Ren and Zhou, 2010a,b; Ren et al.,
2009b) have been much explored. Second, most of the previous works
focus on studying the statistical properties of recurrence intervals series
between extreme events. In this paper, we attempt to apply recurrence
interval analysis to risk estimation, and to provide a relation between
mean recurrence interval and VaR, in which case empirical evidence is
given why traditional methods overestimate or underestimate value at
risk in the complex financial system. Finally, we test whether behaviors
of CSI 300 index and futures are consistent with results of previous studies
by using loss probability distribution. To our surprise, a crossover is found
in the loss probability plot, which is different from the power–law prop-
erties found in (Ren and Zhou, 2010a). This difference has its own eco-
nomic explanations which will be given below.
The rest of this paper is organized as follows. Section 2 describes data
and sample selection, and presents basic statistics. Section 3 examines the
empirical distributions of the recurrence intervals of the spot and futures
returns. Section 4 studies the short and long term memory effect based on
the conditional probability distribution and detrended fluctuation analy-
sis (DFA) method. Section 5 explores the risk improvement for the stock
index futures and spot markets in China. Section 6 is the conclusion.
2. Data description
Since the inception of the Shanghai Securities Exchange (SHSEX)
and the Shenzhen Securities Exchange (SZSEX) in the early 1990s, the
Chinese financial markets have experienced tremendous growth and
attracted increasing attention. By the end of 2006, there were already
1434 listed companies in China, out of which 109 companies issued B
shares. A total of 1265.5 billion shares were issued with an aggregate
market capitalization of RMB 8940.4 billion, and 78.49 million securities
investment accounts were opened, mostly by retail investment. However,
there was no tool for them to hedge their position against downturns in
China's notoriously volatile markets. On September 8, 2006, China Finan-
cial Futures Exchange (CFFEX) was founded in Shanghai. After more than
three years of practice trading, the CSI 300 index futures contract was
launched on April 16, 2010 on the CFFEX, providing investors with a
tool to hedge risks in stock markets.
The CSI 300, which stands for the China Securities Index 300 stock
index, was created by the China Securities and Index Company Ltd. on
April 8, 2005. The index comprises 300 stocks listed on the SHSEX or
SZSEX, and accounts for approximately 70% of the total market capital-
ization of both stock exchanges. Therefore, the index is widely perceived
to comprehensively reflect both the price fluctuations and performance
of China A-share markets. Also note that the aim of designing the stock
346 Y.-Y. Suo et al. / Economic Modelling 49 (2015) 344–353
Table 1
Contract specifications of the CSI 300 index futures.
Underlying index CSI 300 index
Contract multiplier CNY 300
Unit Index point
Tick size 0.2 point
Contract months Monthly: current month, next month, next two calendar
quarters (four total)
Trading hours 09:15 am–11:30 am, 01:00 pm–03:15 pm
Trading hour on last 09:15 am–11:30 am, 01:00 pm–03:00 pm
trading day
Limit up/down +/−10% of settlement price on the previous trading day
Margin requirement 12% of the contract value
Last trading day Third friday of the contract month, postponed to the
next business day if it falls on a public holiday
Delivery day Third friday, same as last trading day
Settlement method Cash settlement
Transaction code IF
Exchange China Financial Futures Exchange
index is for use as the basis for derivatives innovation. A few years later,
for the purpose of managing risk, maintaining market stability and
improving capital allocation in the Chinese economy, index futures
based on the CSI 300 was launched as a historic milestone on the path
to a market-driven economy of the mainland stock markets.
In order to prevent drastic fluctuations of futures market, the CSI 300
index futures are strictly monitored by regulators. Eligible individual in-
vestors must have a minimum of RMB 500,000 yuan (approximately US
$73,000) to open an account for stock index futures trading. Experience
in futures trading and simulated trading of index futures are needed.
They are also required to complete a training course and pass a test be-
fore they can do trading in the market. In contrast, the minimum deposit
of institutional investors is RMB 1 million (approximately US $145,000).
In addition, margin requirements for stock index futures is set at 12 per-
cent to control trading risk, and index futures are subject to a +/−10%
of settlement price on the previous trading day. Details of the contract
specifications of the CSI 300 index futures are shown in Table 1.
The CSI 300 index futures contract prices and underlying asset mar-
ket prices are obtained from the RESSET Financial Research Database
(http://www.cffex.com.cn/). The sample period is from April 16th,
2010 through December 31st, 2012. We construct a continuous time
series for the futures prices by using the price of the main contract
according to the industry standard. The main contract is used because
it is highly liquid and most active. We specify the contract as the main
contract based on the trading volume on a trading day. Table 1 lists
the four CSI 300 index futures contracts being traded simultaneously.
To construct the continuous futures price series, we choose the intraday
prices of the main contracts, which is defined as the contract that has
the largest trading volume among the four contracts on each day.
Fig. 1. Logarithmic returns of CSI 300 index and futures prices.
Compared to the trading hours of the CSI 300 index futures contract,
the spot index contract is traded from 9:30 a.m. to 11:30 a.m. and
from 1:00 p.m. to 3:00 p.m. (Beijing Time), which is 15 minutes after
the opening hours and 15 minutes before the closing hours of the fu-
tures index. Excluding weekends and holidays for which trading is
closed, and also the mismatched data, we end up with 156,000 price ob-
servations for each time series.
The returns of each series are calculated by taking differences of the
logarithms of price as r(t) = |lnp(t) − lnp(t − Δt)|, where p(t) is the
closing price of the tth minute. The logarithmic returns of the CSI 300
index and the futures index are shown in Fig. 1(a) and (b) respectively
and their statistics are summarized in Table 2.
Table 2 shows that the fluctuations of the spot and futures range
between − 0.03 and 0.05 while the mean and standard deviation of
two returns series are similar. On the other hand, both the spot and
futures indices display fat excessive kurtosis with large kurtosis coeffi-
cients (384.88 and 160.90, respectively). We note that the main differ-
ence is their skewness behavior: the CSI 300 index is negatively
skewed while the futures is positively skewed (−0.086 and 2.020 re-
spectively), in agreement with the result of (Hou and Li, 2013).
To the best of our knowledge, most researchers are more interested
in using the returns of asset price to study the properties and dynamical
mechanisms of the financial markets, e.g., price discovery, volatility
transmission and risk estimation (Ekin and Arda, 2010; Ghosh, 1993;
Helena and Hipolit, 2008; Tse, 1999; Yang et al., 2001, 2012). Referring
to Fig. 1, it is easy to see that there are clusters (namely volatility cluster-
ing phenomenon) in the time series, which is an indication of long term
memory (Lin and Fei, 2013; Liu and Chen, 2013; Yalama and Celik,
2013), i.e. small fluctuations tend to follow small fluctuations, and
large fluctuations tend to follow large fluctuations. This phenomenon
has been investigated by many researchers (Cunado et al., 2010; Xie
et al., 2014; Yamasaki et al., 2005). A question of interest in this study
is whether there is a new method we can use to describe this behavior
and to estimate the time intervals between large fluctuations, which can
help to improve the risk estimation in the complex market of financial
derivatives? Specifically, when will the next large fluctuation occur
after a large fluctuation is being observed?
3. Empirical probability density function
3.1. Recurrence interval
To examine the memory behaviors and to improve risk estimation of
the CSI 300 index futures and spot market in China, we follow the work
of (Bogachev and Bunde, 2009; Bogachev et al., 2007; Ren and Zhou,
2010a; Yamasaki et al., 2005) and take the probability distribution of re-
currence intervals between large fluctuations into consideration first. In
 Y.-Y. Suo et al. / Economic Modelling 49 (2015) 344–353
Table 2
Statistics of the logarithmic returns of the CSI 300 and its futures.
Minimum Maximum Mean
Spot −0.031 0.046 −1.88e−6
Futures −0.027 0.051 −1.97e−6
order to apply the recursive interval analysis, we need to normalize the
price returns of each series by dividing its standard deviation
r ðt Þ
Rðt Þ ¼ h i1=2 :
b r ðt Þ N − b rðtÞ N 2
2 stretched exponential function f ðxÞ ¼ ατe−ðβτxÞ (Xie et al., 2014).
Using the normalized sequences R(t), we measure the recurrence
intervals by introducing a threshold q. A recurrence interval τ is defined
as the time interval from the time when the returns of the normalized
prices drops below the threshold q N 0 or rises above the threshold
q b 0 to the next time point that it passes the threshold again as illustrated
in Fig. 2. The return interval τq = 1 and τq = −1 for the thresholds q = 1
and q = −1 are indicated in the figure for the part of normalized return
series R(t) of the CSI 300 index return, and the patches in Fig. 2 are highly
obvious as the results of (Yamasaki et al., 2005), which are the indication
of memory, as short recurrence intervals tend to follow short intervals,
and long intervals tend to follow long intervals.
3.2. Empirical probability density function
We begin by studying the behavior of the empirical probability
density function Pq(τ) of the recurrence intervals between returns
with different values of threshold q for the spot and futures, and show
its dependence on q. The results are shown in Fig. 3(a) and (b). Fig. 3
shows that Pq(τ) decays slower for larger thresholds, in agreement
with the fact that the recurrence intervals between returns that exceed
the thresholds should be longer than that for smaller thresholds. Fur-
thermore, Pq(τ) is symmetrical between positive threshold q N 0 and
negative threshold q b 0, having the same magnitude for both the CSI
300 index and futures. When focus on the same threshold q, the proba-
bility Pq(τ) decreases with increasing recurrence interval τ. This implies
that when the last extreme event above a threshold q occurred t units of
time ago, the probability Pq(τ) of another extreme event above q to
occur Δt1 later is larger than Δt2, if Δt1 b Δt2. This result suggests that
if the investors suffered heavy loss when experienced the large fluctua-
tion in the stock market just some time units ago, they should be aware
that the probability that the next strong fluctuation would come within
a shorter time interval is larger than that of a longer time interval.
On the other hand, with a fixed recurrence interval γ, the probability
Pq(τ) increases with increasing threshold values. If an extreme event
Fig. 2. Schematic illustration of recurrence intervals between returns.
347
Standard deviation Skewness Kurtosis Nobs
6.83e−4 −0.086 384.88 156,000
8.44e−4 2.020 160.90 156,000
has occurred, the probability that the next extreme event would occur
will be higher for larger thresholds.
The probability density function of the recurrence interval between
large returns of the CSI index and its futures are now fitted with the
ð1Þ γ
The parameters of the function based on the maximum likelihood
estimation are shown in Table 3. The coefficient of the exponent γ of
the stretched exponential function is the correlation exponent charac-
terizing the long term memory of the recurrence intervals. Note that
the correlation exponents of futures are in the range between 0.26
and 0.39, while the corresponding exponents of the spot index are
much smaller within the interval (0.20, 0.24). It is obvious that the
long memory effect in the recurrence intervals of futures dies out faster
than the spot, meaning that high frequency trading should be preferred
for futures speculators. Although the results above seem to be useful to
the investors and regulators, the more relevant question is: Are there
any scaling relations between these empirical probability density
functions?
3.3. Scaled probability density function
To explore the universal properties of the recurrence intervals, we
scale the recurrence intervals by the mean interval τ≡τ with threshold
q, and the scaled probability density function P q ðτ Þτ, as a function of
the scaled return intervals τ=τ is shown in Fig. 4. One can see that the
curves for different thresholds q approximately collapse onto a single
curve as shown for the spot and futures in Fig. 4(a) and 4(b). Thus the
probability density functions take the following scaling relation
(Yamasaki et al., 2005)
1
P q ðτÞ ¼ f ðτ=τÞ : ð2Þ
τ
Note that the universal scaling function f(x) does not depend directly
on the mean return interval τ, but only through the threshold q. There-
fore, if the probability density function Pq(τ) for one threshold q is
known, the probability density function for other thresholds can be de-
duced from Eq. (2). One can therefore predict the large fluctuations or
extreme events in the financial market by first estimating the
probability distribution of small fluctuations with rich data, and then
extrapolate the probability distribution of extreme events by using the
scaling function.
To better understand the origin of the scaling behavior, we reshuffle
the time series and study the probability density function of the recur-
rence intervals of the reshuffled returns of the CSI 300 index and futures
time series. This would then remove correlations in the returns
sequences. It is easy to see that the original time series has higher
probability for both small and large intervals when compared to the
reshuffled series as shown in Fig. 4.
4. Memory effect
Although Pq(τ) provides us with a scaling behavior, it may still not
fully characterize the recurrence interval series between returns. In-
deed, if the recurrence intervals in the series are independent of each
other without correlation, they will totally be determined by Pq(τ). On
the other hand, if the recurrence intervals are correlated, they may be
a result of the memory effect. The clustering phenomenon above
348 Y.-Y. Suo et al. / Economic Modelling 49 (2015) 344–353

Fig. 3. Empirical probability distributions Pq(τ) of the recurrence intervals between returns with different threshold q for CSI 300 index and futures.

Table 3 four bins Q1, Q2, Q3 and Q4 with the same length. By definition, the N/4
Estimates of α, β and γ of the stretched exponential function. smallest recurrence intervals are put in the first bin Q1 while Q4 contains
q α β γ α β γ the largest quarter of N.
1.0 0.05 0.13 0.40 0.79 16.5 0.23
We show the scaled conditional probability density function
1.2 0.07 0.33 0.32 0.49 17.8 0.22 P q ðτjτ 0 Þτ as a function of τ=τ for τ0 in the largest (open symbols) and
1.4 0.05 0.35 0.30 0.27 11.7 0.21 smallest (filled symbols) subsets in Fig. 5. For τ0 in Q1, P q ðτjτÞ is larger
1.6 0.03 0.29 0.28 0.11 4.0 0.22 for small τ=τ while for τ0 in Q4, P q ðτjτ Þ is larger for large τ=τ. The fact
1.8 0.03 0.40 0.26 0.07 3.4 0.21
Future −1.0 0.10 0.24 0.38 Spot 0.60 11.1 0.24
that small τ tends to follow small τ0 and large τ follows large τ0 indicates
−1.2 0.04 0.11 0.38 0.27 5.95 0.23 that short memory exists in the recurrence intervals. Furthermore,
−1.4 0.03 0.13 0.33 0.16 5.11 0.22 P q ðτjτ Þ collapses into a single scaling function for both Q1 and Q4 for
−1.6 0.02 0.07 0.33 0.07 3.4 0.21 all thresholds q. This suggests that the sequences of the recurrence
−1.8 0.01 0.11 0.29 0.04 3.0 0.20
intervals cannot be characterized by Pq(τ) and memory is indeed in
the sequences.
suggests that memory exists in these sequences, which is another The short term memory can also be observed in τ0 =τ, which is the
important characteristic feature of financial markets. To demonstrate mean recurrence intervals when the two extreme events occurred
the memory effect in the recurrence intervals between large returns of some time ago were separated by an interval τ0. To calculate τðτ 0 Þ
the CSI 300 index and futures, we use the conditional probability densi- using the divided-bin method of Pq(τ|τ0), we put the recurrence inter-
ty function Pq(τ|τ0), the mean conditional interval τ ðτ0 Þ and carry out vals into eight consecutive bins for each threshold q in increasing
the detrended fluctuation analysis (DFA). order. Each bin contains N/8 intervals, and we calculate the mean
value in every sub-interval.
Fig. 6 gives the scaled mean condition recurrence interval τðτ0 Þ=τ as
4.1. Short memory effect a function of scaled recurrence interval τðτ0 Þ of the CSI 300 index and
futures with open color symbols, which shows clearly the effect of
To quantify the memory effect in the recurrence interval, we first in- memory as the Pq(τ|τ0), i.e., small recurrence intervals are more likely
vestigate the conditional probability density function Pq(τ|τ0), which is to follow small intervals, and large ones tend to follow large ones,
the probability of finding a recurrence interval τ immediately after the similar to the phenomenon in Pq(τ|τ0). On the other hand, the
recurrence interval τ0. To get better statistics, we study the conditional reshuffled sequences with black symbols are almost constant
probability density function Pq(τ|τ0) not for a specific value of τ0, but (approaches 1) as the expected equation τ=τ≡1, which demonstrates
for values of τ0 in certain intervals. Specifically, we have sorted the re- that recurrence intervals are independent of the preceding return
currence interval records in increasing order and partitioned it into interval in the reshuffled records.

Fig. 4. Scaled probability distributions of recurrence intervals of original and reshuffled (inset) data for different thresholds of the CSI 300 spot index and futures.
 Y.-Y. Suo et al. / Economic Modelling 49 (2015) 344–353
Fig. 5. Scaled conditional probability density function P q ðτjτ 0 Þτ of scaled recurrence intervalsτ=τ with τ0 in Q1 (solid symbols) and Q4 (open symbols) for the CSI 300 index and futures. The
solid curves are fitted curves.
The quantities of conditional probability density function Pq(τ|τ0)
and the mean conditional intervals τðτ 0 Þ indicate that short memory ex-
ists in the recurrence intervals τ between large returns of the CSI index
and futures. These results imply that if two extreme events occurred
some time ago were separated by a small interval τ0, another extreme
event with the same threshold q would occur with a larger probability
within a smaller interval τ than a longer interval. In other words,
when there is a sharp decline in the stock market, there is a high prob-
ability that it will continue to fall. A scenario which could probably be
due to fear across the market.
4.2. Long memory effect
In the previous sections, scaling behavior and short-term memory
are shown in the recurrence interval sequence, which are related to
the long-term memory presented in (Yamasaki et al., 2005) and
(Wang et al., 2006). To further investigate the long-term memory of
the recurrence intervals between high-frequency returns of the Chinese
stock index and futures market, detrended fluctuation analysis (DFA) is
adopted here, which is a powerful method to characterize the long-term
correlation in time series (Chen et al., 2002, 2005; Hu et al., 2001;
Kantelhardt et al., 2001) DFA computes the detrended fluctuation
function F(s) of a time sequence within a window of s time units and
determines the exponent H from the scaling form F(s) ∼ s H, where H is
the Hurst exponent. If H N 0.5, the sequence is long-term correlated
while the sequence is uncorrelated for H = 0.5. Fig. 7 shows the
detrended fluctuation function F(s) of the recurrence intervals for neg-
ative thresholds q between returns of the CSI 300 index and futures.
Fig. 6. Scaled mean condition recurrence interval τ ðτ 0 Þ=τ as a function of scaled recurrence intervals τ 0 =τ between returns of the CSI 300 index and futures.
349
The fitted lines in the log–log plot reveal the fact that the detrended
fluctuation function F(s) satisfies a scaling relation as F(s) ∼ s H. The
exponents H can therefore be obtained from the slope of the fitted lines.
To further understand the long memory effect, Fig. 8 is a plot of the
estimated Hurst exponents H of the recurrence intervals between
returns. For both the CSI 300 index and futures, the exponents H
are greater than 1/2, suggesting that long term memory exists in the
recurrence interval series. One also notices that the Hurst exponents
of futures are larger than the Hurst exponents of the spot for the same
thresholds, meaning that futures have stronger long-term memory ef-
fect. For comparison, we also obtain the Hurst exponents of the
reshuffled time series which are shown in Fig. 8. Their Hurst exponents
are close to 0.5 as expected. This is in agreement with previous studies
(Ren and Zhou, 2010b; Ren et al., 2009b; Wang et al., 2006, 2007) on
the recurrence intervals in financial markets and confirms the fact that
long-term memory effect on recurrence intervals exists in the Chinese
stock index and futures high-frequency returns time series.
5. Risk estimation
In the previous section, we have carried out a thorough statistical
analysis of the return intervals of the CSI 300 index and futures. In this
section, we will apply the scaling memory behavior and memory prop-
erties of recurrence intervals between returns to estimate risk. We will
use the hazard function Wq(Δt|t) (Bogachev and Bunde, 2009; Bogachev
et al., 2007; Ren and Zhou, 2010a; Xie et al., 2014) and loss probability
(Wang et al., 2007) to estimate the risk in the CSI 300 index and futures
markets.
350 Y.-Y. Suo et al. / Economic Modelling 49 (2015) 344–353

Fig. 7. Detrended fluctuation function F(s) of the recurrence intervals between returns of the CSI 300 index and futures.

5.1. Hazard function Color symbols shown in Fig. 9 are the hazard function Wq(Δt = 1|t)
for different negative thresholds obtained numerically by using Eq. (4)
The hazard function Wq(Δt|t) is the central quantity for risk estima- for CSI 300 index and futures. Wq(Δt = 1|t) shows a slow decreasing
tion in the recurrence interval analysis. It is defined as the probability trend with respect to t in the range between 1 and 60 time units, in
that within a short time interval Δt at least one extreme event (below agreement with the long term correlation in the previous section.
negative thresholds) would occur, given that the last extreme event Given a threshold q, one can compute the probability of the occurrence
occurred at t time units ago (Bogachev and Bunde, 2009; Bogachev of the next extreme event. The black solid lines in Fig. 9 are the theoret-
et al., 2007). By definition, the hazard function can be expressed as ical results obtained by using Eq. (3). One can see that the theoretical
follows and numerical results of Wq(Δt|t) agree with each other for large t.
The difference increases when t gets smaller, suggesting that the hazard
Z tþΔt
function Wq(Δt|t) evaluated by using Eq. (3) overestimates risk for short
P q ðτÞdτ
time period.
W q ðΔtjt Þ ¼ tZ ∞ : ð3Þ
P q ðτÞdτ
t 5.2. Loss probability

We here use the parameters given in Table 3 to compute the theo- In this section, we will use the loss probability density function in
retical value of Wq(Δt|t) for a given short time interval. RIA to evaluate the value at risk (VaR), a well-known indicator of risk
To numerically evaluate Wq(Δt|t) from the empirical time series, we in financial markets. VaR is defined as the risk at a level of loss q
use the following discretized form (q b 0, same as the negative thresholds above) as follows:
  Z −∞
count t b τ q b t þ Δt P ðRÞdR ¼ P  ð5Þ
W q ðΔtjt Þ ¼   ð4Þ
count τ q N t q

where P(R) is the probability density function for the normalized

where “count(τq N t)” is the number of recurrence intervals longer than
returns R(t) and P * is the probability of loss. The mean recurrence inter-
t time units and “count(t b τq b t + Δt)” is the number of recurrence N
intervals between t and t + Δt for a given q. val is defined as τ q ≡ N1q ∑i¼1
q
τq;i , where Nq is the number of intervals
N
which fall below the negative threshold q. Furthermore, ∑i¼1q
τq;i is
approximately equal to the total number of returns and Nq + 1 is the
number of returns below the negative threshold q. We then get the
relation between mean recurrence interval τq and VaR via Eq. (5) as
follows:

Z q
1 number of returns below negative threshold q
¼ dR ¼ : ð6Þ
τq −∞ total number of returns

Fig. 8. Hurst exponent H of the CSI 300 index (red open symbols) and futures (blue open
symbols) and the reshuffled series (solid symbols). (For interpretation of the references to
color in this figure legend, the reader is referred to the web version of this article.)
It was pointed out by (Ren and Zhou, 2010a) that the reciprocal of
the mean recurrence interval 1=τ and the absolute threshold |q| exhibits
power–law relationship. We here instead find crossover points in the
log–log plot for the CSI 300 index (at q0 = − 4) and futures (at
q0 = − 8),as shown in Fig. 10. This becomes clear if one performs a
semi-log plot as shown in Fig. 11. It is easy to see that the distributions
are significantly different in the two regimes. By definition, we note 1=τ
as loss probability and threshold q the loss. In the small loss regime
(q N q0), we use a power law function 1=τ∼jqj−γ1 to fit the curve. The
values of the exponent γ1 are 0.23 and 2.6 for the CSI 300 index and
 Y.-Y. Suo et al. / Economic Modelling 49 (2015) 344–353 351

Fig. 9. The theoretical (solid curve) and numerical (color symbols) results of Wq(Δt = 1|t) for the CSI 300 index and futures. (For interpretation of the references to color in this figure
legend, the reader is referred to the web version of this article.)

Fig. 10. Reciprocal of mean recurrence interval 1=τ q as a function of absolute threshold |q| for the CSI 300 index and futures, where q is from − 16 to − 1. Green circles correspond to the
whole range of thresholds, blue diamonds and red squares in the insets correspond to the small loss and large loss regimes respectively. (For interpretation of the references to color in this
figure legend, the reader is referred to the web version of this article.)

futures respectively. In the large loss regime (q b q0), the curve follows Stoll and Whaley, 1990; Yang et al., 2001) it is widely perceived that
an exponential decay 1=τ∼expð−γ 2 jqjÞ as illustrated in Fig. 11: the index futures market leads over the spot index market and plays a
dominant role in price recovery, which is confirmed by the study of

1 jqj−γ1 (Hou and Li, 2013) on the financial market of China. Therefore, the price
∼ : ð7Þ
τq expð−γ 2 jqjÞ

The results are shown in column 4 of Table 4 and the insets of Fig. 10.
Therefore, if one wants to know the risk level corresponding to 1%
probability of loss within the time interval of unit time, one will look
at the loss probability 1=τ ¼ 1%, and get the corresponding risk level
q, which is the VaR one is looking for.
It is worth to point out the mechanism of loss probability functional
changes at the crossover point. The loss probability initially decreases
sharply as a power–law function, and turns into an exponential decay
at the crossover point. The result implies that it is inevitable to overesti-
mate or underestimate the value at risk (Dimitrios et al., 2014; Su, 2014;
Su and Hung, 2011) in the complex financial market if one only uses a
single functional form of distribution for the fitting.
The crossover behavior in Fig. 11 strongly suggests that the two
regimes are governed by different mechanisms. One further notices that
the crossover points for the CSI 300 index and futures market are differ-
ent, as illustrated in Fig. 11. Theoretically speaking, from the experience Fig. 11. Semi-log plot of the reciprocal of mean recurrence interval 1=τ q as a function of
of developed economies (Bohl et al., 2001; Kavussanos et al., 2008; absolute threshold |q|,where q is from − 16 to − 1 for the CSI 300 index and futures.
352 Y.-Y. Suo et al. / Economic Modelling 49 (2015) 344–353
Table 4
Estimated parameters γ1 and γ2 of loss probability.
q0 γ1
Future −4 0.23
Spot −8 2.6
change in index futures market is more volatile, and the corresponding
probability is bigger at the same loss level q, which contribute to the larger
crossover position. The above result implies that there is higher (lower)
risk in the spot market than the futures markets during volatile (normal)
periods.
On the other hand, in Chinese markets, there are more institutional
investors for the higher barriers in the stock index futures market, and
empirical evidences suggest that institutional investors are more ratio-
nal and better informed than individuals (Ahn et al., 2008; Boehmer
et al., 2008; Chakravarty, 2001). The risk in the futures market during
volatile periods would then be lowered than the spot market which
mainly consists of individuals who mostly follow the capital flows of
institutions especially during market crashes. The above findings
therefore reveal the fact that for the same threshold q, the probability
of loss in the futures market is larger than the spot market when the
financial system is normal (|q| is small) but is smaller than the spot
market when the market is more volatile (|q| is large). This in turn
contributes to the different crossover positions in the CSI 300 index
and futures markets.
6. Conclusion
Using intraday high frequency data, we investigate the scaling be-
havior, memory effects and risk estimation by the recurrence interval
analysis method for the Chinese stock index and the newly introduced
stock index futures markets in China.
We find that the probability density functions of the recurrence in-
tervals with different thresholds collapse onto a single curve which
only depends on the scaled interval τ=τ for both the CSI 300 index
and futures. This is consistent with recent findings on the global curren-
cy markets (Yamasaki et al., 2005), U.S. stock market (Wang et al., 2006,
2007) and Chinese stock markets (Ren and Zhou, 2010a,b; Ren et al.,
2009b).
Short memory effect is also found in recurrence intervals between
returns by investigating the conditional probability density function
Pq(τ|τ0) and the mean conditional recurrence interval τðτ0 Þ, meaning
that a small recurrence interval is more likely to be followed by a
small interval, and large intervals are more likely to be followed by
large intervals. In addition, long-term correlation exists in the recur-
rence intervals, which is tested by the detrended fluctuation analysis
(DFA) method. The findings on memory effect are also in line with
that of (Ren and Zhou, 2010a), who first demonstrated the existence
of memory effect in recurrence intervals between financial returns.
Finally, we apply the recurrence interval analysis (RIA) to evaluate
the risk for the Chinese stock index and stock index futures markets,
which provide relatively accurate estimates of the hazard function
Wq(Δt|t) and forge a link between loss probability and VaR. The cross-
over in the profile of loss probability indicates that there are different
mechanisms in the small and large loss regimes. This in turn sheds
light on the issue of either overestimating or underestimating the
value at risk in complex financial markets with a single functional
form of distribution of loss. These results would enable us to improve
risk estimation and are useful for management of risks in financial
markets.
Acknowledgment
The authors would like to thank an anonymous reviewer for his
constructive suggestions and comments. This work was supported by
the National Science Foundation of China (Grant No.71171083), the
Innovation Program of Shanghai Municipal Education Commission
γ2 (Grant No.14ZS058) and the Humanities and Social Sciences Fund,
0.16
sponsored by the Ministry of Education of the People's Republic of
2.6 China (Grant No.09YJC630075).
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