Commonality in trading activity and futures‐cash basis: Evidence from the Taiwan futures and stock markets

Lee, Hsiu-Chuan; Chien, Cheng-Yi; Liao, Tzu-Hsiang

doi:10.1002/fut.20541

Cited by 14 publications

(10 citation statements)

References 30 publications

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“…The results thereby suggest that liquidity plays an important role in moving markets toward an efficient outcome. Same findings have been documented in the international markets as well (e.g., Lee, Chien and Liao, 2012;Kadapakkam and Kumar, 2013).…”

Section: Topic 2: Market Efficiencysupporting

confidence: 77%

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Essays on empirical asset pricing

Pan¹

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This thesis focuses on empirical asset pricing, and it contains the following three essays:The first essay derives a U.S. government bond market volatility index (GBVX) based on the Arrow-Debreu state-contingent pricing methodology. We show that GBVX is an unbiased predictor for the next 30-day realized volatility of the Treasury note futures return. GBVX also subsumes the information of GARCH, EWMA and historical volatility measures. Furthermore, GBVX serves as an effective predictor for the future realized volatilities of a wide class of fixed income portfolios. The results suggest GBVX served as a powerful instrument for volatility forecasting in the fixed income markets.The second essay shows that the innovation in GBVX delivers statistically and economically significant in-sample and out-of-sample predictive power for U.S. equity risk premium over the recent 2000-2015 sample period. It yields a sizable increase in terminal wealth growth, Sharpe ratio, and utility gains. In addition, the predictive ability of the innovation in GBVX is comparable to, and in a majority of cases, surpasses those of conventional predictors commonly used in the literature, as well as a range of historical and other implied volatility indices. The strong predictive ability of the innovation in GBVX stems from its anticipation of cash flow news.In the third essay, we test the hypothesis that liquidity and pricing efficiency causally affect each other. As a response to the 2015 Chinese stock market crash, regulators prohibited arbitrage activities in the index futures and cash markets. Based on this natural experiment, we find that the absence of arbitrage activities led to the breakdown of the two-way causality relation between liquidity and the absolute futures-cash basis. We thus confirm that the relation between liquidity and the absolute futures-cash basis is not driven by the omitted variable bias, but is indeed due to arbitrage.iii Declaration by AuthorThis thesis is composed of my original work, and contains no material previously published or written by another person except where due reference has been made in the text. I have clearly stated the contribution by others to jointly-authored works that I have included in my thesis.

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Section: Topic 2: Market Efficiencysupporting

confidence: 77%

“…1 This twoway relation also exists in the international markets (e.g., Lee, Chien and Liao, 2012;Kadapakkam and Kumar, 2013).…”

Section: On the Relation Between Liquidity And The Futures-cash Basismentioning

confidence: 99%

Essays on empirical asset pricing

Pan¹

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“…However, the obtained results are not always consistent (Terza et al, 2008) [31]. We believe that the basis value lagging by two phases can be introduced in the right side of the regression model (12) to serve as the instrumental variable. The quantile regression based on the instrumental variable can relatively effectively reduce the endogeneity of the model.…”

Section: Robustness Analysis Of the Endogeneity Caused By Thementioning

confidence: 79%

“…Fourthly, irrational noise trade is likely to result in the continuous rise of the market price and the theoretical price. From the perspective of trading behavior of different types of investors, Lee et al (2012) [12] found from empirical research that irrational behaviors of investors in different structures have different influences on the basis. Therefore, the effects of the investor sentiment on the basis can be probably impacted by different investor structures: institutional investors in the market are basically more rational in terms of the investment (Daniel et al, 1997) [13], while individual investors are more likely to behave irrationally while making their investment decisions (Odean, 1998) [14].…”

Section: Hypotheses To Be Tested and Research Designmentioning

confidence: 99%

Investor Sentiment and the Basis of CSI 300 Stock Index Futures: An Empirical Study Based on QVAR Model and Quantile Regression

Liu

2018

Discrete Dynamics in Nature and Society

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The asymmetrical mutual influence of investor sentiment and the basis of CSI 300 stock index futures under conditions in different market situations was investigated using the quantile vector autoregressive model (QVAR). The article also discussed asymmetrical influence of investor sentiment on the basis under conditions in different investor structures using the quantile regression method. On this basis, we obtained several important conclusions: (1) There exists a one-way causal relationship where investor sentiment has a significant impact on the CSI 300 stock index futures basis in China; the investor sentiment is likely to exert stronger influences on the basis in the chaotic period of the stock market and imposes significant asymmetrical effects. (2) The institutionalized development of investors can reduce the influences of investor sentiment on the basis when the stock market is stable, while it does not play its function in stabilizing the capital market when the stock market is in turmoil. (3) The low institutionalization level, the individualization of institutional investors, and the imperfect short-sales mechanism as a whole are still the sticking problems in the immature capital market of China.

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“…1 This two-way relation also exists in the international markets (e.g., Lee, Chien, and Liao, 2012;Kadapakkam and Kumar, 2013).…”

Section: Introductionmentioning

confidence: 99%

On the relation between liquidity and the futures-cash basis: Evidence from a natural experiment

Han¹,

Pan²

2017

Journal of Financial Markets

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Cite this article as: Jianlei Han and Zheyao Pan, On the relation between liquidity and the futures-cash basis: evidence from a natural experiment, Journal of Financial Markets, http://dx.doi.org/10.1016/j.finmar. 2016.12.002 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting galley proof before it is published in its final citable form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain. AbstractAs a response to the 2015 Chinese stock market crash, regulators prohibited arbitrage activities in the index futures and cash markets. We use this natural experiment to test the hypothesis that liquidity and pricing efficiency causally affect each other. We find that resulting shift in the arbitrage boundary led to the breakdown of the two-way causality relation between liquidity and the absolute futures-cash basis. We thus confirm that the relation between liquidity and the absolute futures-cash basis is not driven by the omitted variable bias, but is indeed due to arbitrage.JEL classification: G01, G14, G18

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Commonality in trading activity and futures‐cash basis: Evidence from the Taiwan futures and stock markets

Cited by 14 publications

References 30 publications

Essays on empirical asset pricing

Essays on empirical asset pricing

Investor Sentiment and the Basis of CSI 300 Stock Index Futures: An Empirical Study Based on QVAR Model and Quantile Regression

On the relation between liquidity and the futures-cash basis: Evidence from a natural experiment

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