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

Wan-Chien Chiu, Han-Hsing Lee and Chih-Wei Wang
The Journal of Derivatives Summer 2014, 21 (4) 63-81; DOI: https://doi.org/10.3905/jod.2014.21.4.063
Wan-Chien Chiu
is a lecturer at Adam Smith Business School, University of Glasgow, in Glasgow, Scotland.
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  • For correspondence: wanchien418@gmail.com
Han-Hsing Lee
is an associate professor at the Institute of Finance, National Chiao Tung University, in Hsinchu City, Taiwan.
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  • For correspondence: hhlee@mail.nctu.edu.tw
Chih-Wei Wang
is an assistant professor at the Chinese Academy of Finance and Development, Central University of Finance and Economics, in Beijing, China.
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  • For correspondence: redrum3690@gmail.com
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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.

TOPICS: Options, emerging

  • © 2014 Pageant Media Ltd
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The Journal of Derivatives: 21 (4)
The Journal of Derivatives
Vol. 21, Issue 4
Summer 2014
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Have Domestic Institutional Investors Become as Market Savvy as Foreign Investors? Evidence from the Taiwan Options Market
Wan-Chien Chiu, Han-Hsing Lee, Chih-Wei Wang
The Journal of Derivatives May 2014, 21 (4) 63-81; DOI: 10.3905/jod.2014.21.4.063

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Have Domestic Institutional Investors Become as Market Savvy as Foreign Investors? Evidence from the Taiwan Options Market
Wan-Chien Chiu, Han-Hsing Lee, Chih-Wei Wang
The Journal of Derivatives May 2014, 21 (4) 63-81; DOI: 10.3905/jod.2014.21.4.063
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    • Abstract
    • DATA AND DESCRIPTIVE STATISTICS
    • EMPIRICAL METHODOLOGY: TESTING THE PREDICTABILITY OF PRIVATE INFORMATION ON INDEX RETURNS AND THE LEAD–LAG RELATIONSHIP FOR DIFFERENT TRADER TYPES
    • EMPIRICAL RESULTS
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