Misreaction, hedging pressure, and its effect on the futures market

Chin-Ho Chen and Shu-Fang Yuan

Pacific-Basin Finance Journal, 2024, vol. 86, issue C

Abstract: This study investigates the effect of index option investors' misreaction to the Taiwan index futures market and examines the channel through which this effect occurs. We find that an increase in misreaction during periods of market pessimism leads to greater volatility and illiquidity in the futures market. This negative impact on futures volatility and liquidity can be attributed to market makers' hedging pressure, which is caused by the misreaction occurring within an option market characterized by high volatility and low liquidity during a pessimistic period. Our research presents evidence of a cross-market effect triggered by sentiment-induced misreaction.

Keywords: Misreaction; Market makers; Hedging pressure; Futures market (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:86:y:2024:i:c:s0927538x24001902

DOI: 10.1016/j.pacfin.2024.102439

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