Market Efficiency and Foreign Institutional Trading: Evidence from the Taiwan Futures Market

32 Pages Posted: 22 Aug 2012 Last revised: 31 Oct 2012

See all articles by Robin K. Chou

Robin K. Chou

National Chengchi University

Keng-Yu Ho

National Taiwan University - Department of Finance

Pei-Shih (Pace) Weng

National Dong Hwa University - Department of Finance

Date Written: October 31, 2012

Abstract

The literature frequently views foreign institution investors in emerging markets as informed traders with an information advantage that likely increases market efficiency. Using a unique data set from the Taiwan Futures Exchange (TAIFEX), we directly investigate the informational role played by foreign institution investors. Interestingly, we find that, despite a significant increase in foreign institution trading over the past few years, liquidity costs increased significantly and the informational efficiency of market price actually deteriorated. We find direct evidence showing that the increase in foreign institutional trading is associated with the deterioration of market efficiency. We reconcile this unexpected finding by showing that foreign institution investors are more likely to act as market makers on the TAIFEX by submitting passive limit orders.

Keywords: Foreign institution, Market efficiency, Liquidity cost, Limit order, Order aggressiveness

JEL Classification: G12, G14

Suggested Citation

Chou, Robin K. and Ho, Keng-Yu and Weng, Pei-Shih, Market Efficiency and Foreign Institutional Trading: Evidence from the Taiwan Futures Market (October 31, 2012). 25th Australasian Finance and Banking Conference 2012, Available at SSRN: https://ssrn.com/abstract=2132538 or http://dx.doi.org/10.2139/ssrn.2132538

Robin K. Chou

National Chengchi University ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei, 11623
Taiwan
+886-2-29393091 ext. 81016 (Phone)

Keng-Yu Ho

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Pei-Shih Weng (Contact Author)

National Dong Hwa University - Department of Finance ( email )

Taiwan

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