Investor Sentiment and Microstructure Information in Index Futures Markets

Abstract

We show how specific features of the microstructure information from VPIN and DPIN can volatile the futures market and can link with the price discover and investor sentiment. We develop an investor (institutional, noise, and both) sentiment index for the Shanghai Stock Exchange 50 (SSE 50) Index Futures, and analyze relations among the index futures return, the investor sentiment, VPIN and DPIN, illiquidity, and volatility. We first specify the informed investor sentiment index for traders who invest based on market information and uninformed investor sentiment index for irrational noise traders who provide market liquidity. Empirically, the VPIN and the investor sentiment can predict the SSE 50 futures returns in a low frequency environment, and there is a significantly negative correlation between the informed transaction and the next level of liquidity in a high frequency environment. We also show that the futures market is relatively stable under moderate investor sentiment, and the trading volume can correspond to both investor sentiment and liquidity levels.

Keywords: Sentiment Index; VPIN; DPIN; Granger Casualty; Chinese Futures Market

JEL Classification: G10; G13; G14