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

Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Datong Plaza, 211 West Huaihai Road, Room 603, Shanghai, China 200030, China

Chinese University of Hong Kong, Shatin, NT, Hong Kong SAR, China

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and

Emily Lin

St. John's University, 499, Sec. 4, Tam King Road, Tamsui District, New Taipei City, 25135 Taiwan, R.O.C

Department of Management Science, National Chiao Tung University, 1001 University Road, Hsinchu, Taiwan 300, ROC

Corresponding author.

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https://doi.org/10.1142/S0219091514500027Cited by:5 (Source: Crossref)

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:

JEL: D53, G13, G14, G15

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