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

Charles Chang () and Emily Lin ()
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Charles Chang: Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Datong Plaza, 211 West Huaihai Road, Room 603, Shanghai, China 200030, China;
Emily Lin: St. John's University, 499, Sec. 4, Tam King Road, Tamsui District, New Taipei City, 25135 Taiwan, R.O.C;

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2014, vol. 17, issue 01, 1-30

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.

Keywords: Basis risk; futures arbitrage; liquidity; probability of informed trading; market maturity; D53; G13; G14; G15 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2014
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219091514500027

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