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Informed Futures Trading and Price Discovery: Evidence from Taiwan Futures and Stock Markets

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  • Yi-Tsung Lee
  • Wei-Shao Wu
  • Yun Yang

Abstract

This article focuses on the information effects between the futures market and its spot market. Intraday data are used to investigate the lead-lag relationships between the returns and trading activity of Taiwan stock index futures and the spot returns. We focus on the transmission direction and the sources of information. Consistent with most previous studies, our results show that other than the contemporaneous relationship predicted by carry-cost theory and efficient market theory, futures returns significantly lead spot returns, which implies that informed trades may occur in the futures market. Using private transaction information, net open buy, as a proxy for futures trading activity and distinguishing different types of futures traders, we find that foreign institutional traders are the major source of informed trades because their trading has predictive power for future movements in both spot and futures prices. Traders in other categories are information laggards. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Yi-Tsung Lee & Wei-Shao Wu & Yun Yang, 2013. "Informed Futures Trading and Price Discovery: Evidence from Taiwan Futures and Stock Markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(3), pages 219-242, September.
    • Handle: RePEc:kap:apfinm:v:20:y:2013:i:3:p:219-242
    DOI: 10.1007/s10690-013-9165-4
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    2. Lyudmila A. Glik & Oleg L. Kritski, 2014. "Detecting informed activities in European-style option tradings," Papers 1403.3294, arXiv.org.
    3. Lyudmila A. Glik & Oleg L. Kritski, 2014. "Finding informed traders in futures and their inderlying assets in intraday trading," Papers 1402.6583, arXiv.org.
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    5. Huo, Rui & Ahmed, Abdullahi D., 2018. "Relationships between Chinese stock market and its index futures market: Evaluating the impact of QFII scheme," Research in International Business and Finance, Elsevier, vol. 44(C), pages 135-152.

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