Narrow Results

By utilizing vector error correction model (VECM) and EGARCH model, this article uses 5-minute intraday data to examine the interaction of return and volatility between Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX) and the newly introduced TAIEX futures. VECM model shows that there exists bi-directional Granger causality between index spot and index futures markets, but spot market plays a more important role in price discovery. The results of impulse response function and information share indicate that most of the price discovery happens in index spot market. The evidence of EGRACH shows that the impacts of spot and futures innovations are asymmetrical, and the volatility spillovers between spot and futures markets are bi-directional. However, the information flow from spot to futures is stronger. These results suggest that the TAIEX spot market dominates the TAIEX futures market in terms of return and volatility.

This article uses daily data from July 21, 1998 to July 31, 2000 to examine the hedging effectiveness, price behavior, and lead-lag relationship of SGX MSCI Taiwan index futures and TAIFEX TAIEX futures. By applying the Bayesian approach using Gibbs sampler, we find that TAIFEX index futures has a better hedging performance. A variance ratio test reveals that mean reversion and negative correlation of returns exist in SGX index futures. Only TAIFEX TAIEX futures is cointegrated with TAIEX spot. The uni-directional Granger causality between the two futures markets and spot market are from SGX to TAIEX and from TAIEX to TAIFEX. In terms of price discovery, SGX MSCI Taiwan index futures play a more important role than TAIFEX TAIEX futures.

This paper examines the arbitrage opportunity existing between Taiwan stock index futures and spot markets with the consideration of transaction costs. Index-futures arbitrageurs only enter into the market if the deviation from the equilibrium relationship is sufficiently large to compensate for transaction costs, as well as risk and price premiums. Employing the 5-minute intraday data of Taiwan index futures contracts, this paper uses the threshold cointegration model to estimate the upper and lower thresholds within which arbitrage is not profitable and, hence, the mispricing errors do not adjust back to equilibrium in the central regime. Combining these thresholds with an error correction model (ECM), empirical results show that there exists bi-directional Granger–causality relationship between index futures and spot markets. However, once the long-run cointegrated equilibrium does not hold, re-establishment of the equilibrium situation mostly depends on price adjustment in the futures market.