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Journal of Economics and Finance

Erschienen in:

24.01.2023

Impact of futures’ trader types on stock market quality: evidence from Taiwan

verfasst von: Ya-Wen Lai

Erschienen in: Journal of Economics and Finance | Ausgabe 2/2023

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Abstract

This study investigates whether specific types of institutional futures traders have varying impacts on the quality of the underlying stock market. An assessment of the traders’ effect on market-level price efficiency and excess volatility reveals that futures trading by foreign institutions diminishes the quality of the stock market. On the other hand, futures trading by dealers and investment trusts marginally increases quality, with dealers improving intraday price efficiency and investment trusts reducing excess volatility. This study provides evidence of negative information spillovers driven by foreign investors, thus supporting Stein’s (1987) and Biais and Hillion’s (1994) argument.

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In Goldstein et al. (2014) model, sophisticated investors can access both the derivatives and spot market, while unsophisticated investors can only speculate in the spot market.

See Sect. 2 for more discussions.

The average turnover rates for foreign institutions, dealers, and investment trusts are 160, 602, and 42 times per contract per year, respectively (author’s calculation using data from July 1, 2007, to December 31, 2017). Annual turnover rate is estimated as total trading volume divided by the mean value of daily open interest over a year.

As a market maker, dealers have the advantages of lower transaction costs and direct access to consumer demand and supply in the derivatives market.

This study uses stock market liquidity as a control variable in the empirical models when examining traders’ effect on the price efficiency or excess volatility of the stock market.

Please refer to Regulations Governing Futures Trust Funds (https://law.moj.gov.tw/ENG/LawClass/LawAll.aspx?pcode=G0400138).

Please refer to the statistics from FundClear (https://www.fundclear.com.tw)

According to a research report by Taiwan’s Financial Supervisory Commission (2006), the annual turnover rate for dealers was 135.9 times per contract and their day trades accounted for 55.68% of trading volume.

To decompose the monthly position (volume) series, this study uses a three-month moving average of positions held by dealers, foreign institutions, and investment trusts to denote long-term position trends. The de-trended series is then divided into expected and unexpected components using the VAR model in Eq. (13) with the number of AR terms, p, set to 3.

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Titel: Impact of futures’ trader types on stock market quality: evidence from Taiwan
verfasst von: Ya-Wen Lai
Publikationsdatum: 24.01.2023
Verlag: Springer US
Erschienen in: Journal of Economics and Finance / Ausgabe 2/2023
Print ISSN: 1055-0925
Elektronische ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-022-09612-9

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