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On the Determinants of Basis Spread for Taiwan Index Futures and the Role of Speculators

Author

Listed:
  • Charles Chang

    (Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Datong Plaza, 211 West Huaihai Road, Room 603, Shanghai, China 200030, China;
    Chinese University of Hong Kong, Shatin, NT, Hong Kong SAR, China)

  • Emily Lin

    (St. John's University, 499, Sec. 4, Tam King Road, Tamsui District, New Taipei City, 25135 Taiwan, R.O.C;
    Department of Management Science, National Chiao Tung University, 1001 University Road, Hsinchu, Taiwan 300, ROC)

Abstract

This paper investigates basis spreads on index futures listed on the Taiwan Futures Exchange. We analyze the role of speculators and of informed trading in Taiwan's futures market using intraday data during the five-day pre-expiration period. We demonstrate that liquidity, volatility, and informed trading are each significantly positively related to spread magnitude, indicating that speculators may dominate arbitrageurs. While spreads have narrowed as the market has matured, liquidity and informed trading continue to widen spreads despite the fact that a naïve arbitrage strategy outperforms the market.

Suggested Citation

  • Charles Chang & Emily Lin, 2014. "On the Determinants of Basis Spread for Taiwan Index Futures and the Role of Speculators," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-30.
    • Handle: RePEc:wsi:rpbfmp:v:17:y:2014:i:01:n:s0219091514500027
    DOI: 10.1142/S0219091514500027
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    Citations

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    Cited by:

    1. Yu-Lun Chen & Yin-Feng Gau & Wen-Ju Liao, 2016. "Trading activities and price discovery in foreign currency futures markets," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 793-818, May.
    2. Emily Lin & Chu-Lan Michael Kao & Natasha Sonia Adityarini, 2021. "Data-driven tree structure for PIN models," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 411-427, August.
    3. Thomas Pöppe & Michael Aitken & Dirk Schiereck & Ingo Wiegand, 2016. "A PIN per day shows what news convey: the intraday probability of informed trading," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1187-1220, November.
    4. Mohamed Rochdi Keffala, 2017. "Are Derivatives Implicated in the Recent Financial Crisis? Evidence from Banks in Emerging Countries," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(01), pages 1-41, March.

    More about this item

    Keywords

    Basis risk; futures arbitrage; liquidity; probability of informed trading; market maturity; D53; G13; G14; G15;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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