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The Impacts of Individual and Institutional Trading on Futures Returns and Volatility: Evidence from Emerging Index Futures Markets

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  • Wen‐Hsiu Kuo
  • San‐Lin Chung
  • Chiao‐Yi Chang

Abstract

This study examines the impacts of individual and institutional futures trading on both futures returns and volatility using a unique dataset from the Taiwan Futures Exchange. Our findings reveal that trading by individual investors tends to poorly forecast returns and raise market volatility, whereas trading by institutional investors generally forecasts returns more accurately while also reducing market volatility. In particular, the effects of extremely bullish and bearish trading on returns are found to be greater than those arising from normal trading. Further analysis reveals that foreign institutional trading provides stronger and more accurate evidence on futures return predictability than that of domestic institutional investors, although the stabilizing effect of domestic institutional trades is found to be much greater than that of foreign institutional trades. Our results provide support for the argument that institutional investors are better informed, while individual investors are likely to be noise traders, thereby implying the existence of informed trading in the emerging retail‐investor‐dominated Taiwan index futures markets. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:222–244, 2015

Suggested Citation

  • Wen‐Hsiu Kuo & San‐Lin Chung & Chiao‐Yi Chang, 2015. "The Impacts of Individual and Institutional Trading on Futures Returns and Volatility: Evidence from Emerging Index Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(3), pages 222-244, March.
    • Handle: RePEc:wly:jfutmk:v:35:y:2015:i:3:p:222-244
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    1. Bahloul, Walid & Bouri, Abdelfettah, 2016. "The impact of investor sentiment on returns and conditional volatility in U.S. futures markets," Journal of Multinational Financial Management, Elsevier, vol. 36(C), pages 89-102.
    2. Yue Zhao & Difang Wan, 2018. "Institutional high frequency trading and price discovery: Evidence from an emerging commodity futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(2), pages 243-270, February.
    3. Kallinterakis, Vasileios & Liu, Fei & Pantelous, Athanasios A. & Shao, Jia, 2020. "Pricing inefficiencies and feedback trading: Evidence from country ETFs," International Review of Financial Analysis, Elsevier, vol. 70(C).
    4. Yang, Heejin & Kutan, Ali M. & Ryu, Doojin, 2019. "Volatility information trading in the index options market: An intraday analysis," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 412-426.
    5. Yi‐Wei Chuang & Wei‐Che Tsai & Pei‐Shih Weng & Chi Yin, 2021. "Do put warrants unwind short‐sale restrictions? Further evidence from the Taiwan Stock Exchange," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(3), pages 325-348, March.
    6. Wei‐Yu Kuo & Ching‐Ting Lin, 2018. "Trader types and fleeting orders: Evidence from Taiwan Futures Exchange," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(12), pages 1443-1469, December.
    7. Li, Wei-Xuan & French, Joseph J. & Chen, Clara Chia-Sheng, 2017. "Informed trading in S&P index options? Evidence from the 2008 financial crisis," Journal of Empirical Finance, Elsevier, vol. 42(C), pages 40-65.
    8. Wei-Kuang Chen & Ching-Ting Lin & Cheng-Yi Shiu, 2019. "Price discovery and price leadership of various investor types: evidence from Taiwan futures markets," Review of Quantitative Finance and Accounting, Springer, vol. 53(2), pages 601-631, August.
    9. Sensoy, Ahmet & Omole, John, 2022. "Information content of order imbalance in the index options market," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 418-432.
    10. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.
    11. Doojin Ryu & Doowon Ryu & Heejin Yang, 2021. "The impact of net buying pressure on index options prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(1), pages 27-45, January.
    12. Webb, Robert I. & Ryu, Doojin & Ryu, Doowon & Han, Joongho, 2016. "The price impact of futures trades and their intraday seasonality," Emerging Markets Review, Elsevier, vol. 26(C), pages 80-98.
    13. Pedro Piccoli & Newton C. A. da Costa & Wesley Vieira da Silva & June A. W. Cruz, 2018. "Investor sentiment and the risk–return tradeoff in the Brazilian market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(S1), pages 599-618, November.

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