Do Foreign Institutional Traders Have Private Information for the Market Index?

56 Pages Posted: 1 May 2017

See all articles by Pei-Shih Weng

Pei-Shih Weng

National Dong Hwa University

Wei-Che Tsai

Oregon State University; National Sun Yat-sen University - Department of Finance

Date Written: May 1, 2017

Abstract

We investigate whether foreign institutional investors possess private information in index futures trading based upon six-year market index futures transaction data on the Taiwan Futures Exchange (TAIFEX). According to the French and Roll (1986) ‘decomposition of price formation’, our empirical results rule out the possibility that volatility dynamics are driven by public information and mispricing, since the findings indicate that private information proxied by information-related intraday patterns of volatility and bid-ask spread would be the major cause of price variations. A test of the information hypothesis of Schlag and Stoll (2005) provides further support for the existence of private information in foreign institutional trading. Finally, when calculating the cumulative return for foreign institutional traders from detailed account-by-account trading data, the conclusions drawn from our empirical analysis remain unchanged.

Keywords: Foreign institutional investors; Market index futures; Private information

JEL Classification: G10; G14

Suggested Citation

Weng, Pei-Shih and Tsai, Wei-Che, Do Foreign Institutional Traders Have Private Information for the Market Index? (May 1, 2017). International Review of Economics & Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2961141

Pei-Shih Weng

National Dong Hwa University ( email )

No. 1, Sec. 2, Da Hsueh Rd.
Shoufeng, Hualien 97401
Taiwan

Wei-Che Tsai (Contact Author)

Oregon State University ( email )

Corvallis, OR 97331
United States

National Sun Yat-sen University - Department of Finance ( email )

No.70, Lianhai Rd., Gushan District,
Kaohsiung City
Taiwan

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