Have Domestic Institutional Investors Become as Market Savvy as Foreign Investors? Evidence from the Taiwan Options Market

Abstract

Chiu, Lee, and Wang also explore trading by informed investors in TAIEX index derivatives, in this case by looking at put/call ratios. Options on TAIEX are among the most actively traded options in the world. There is sizable participation by individuals, who trade about 50% of all contracts, and also by foreign institutions, which are widely regarded as having better information than domestic Taiwanese investors. The authors also consider domestic institutions and market makers. Excluding market makers, who are assumed to be liquidity providers rather than information traders, each group’s put/call ratio for trades that open a new position is computed daily and used as a predictor of future returns in a vector autoregression, along with a set of control variables. The sample period covers 2007 and 2008, allowing the authors to contrast calm and crisis conditions. The overall tenor of the results reported here will be comforting to believers in efficient markets: There is very little evidence that any group has much power to predict returns in the Taiwan stock market, either from one day to the next, or over shorter intraday intervals. If anything, in this study, domestic individual traders seem to have a little better information than foreign investors.