The Influence of Hedge, Arbitrage, and After-Hours Trading on the Holding Returns of TAIEX Futures

Abstract

This study points out a new explanation of the non-trading effect of financial derivatives from the perspective of hedging demand. We examine the influence of hedging demand on the non-trading effect of TAIEX (Taiwan Stock Exchange Capitalization Weighted Stock Index) Futures. By dividing the sample period into trading period and non-trading period and testing the difference between the risk premiums in these two intervals, we find that there is a non-trading effect in TAIEX Futures, which means that the holding returns of TAIEX Futures in the non-trading period are higher than those in the trading period. By estimating a dummy-regression model, the evidence shows that when the VIX (Taiwan Index Option Volatility Index) indicator is relatively high, the non-trading effect will be more significant, indicating that the non-trading effect may come from investors’ hedging needs. In addition, it is found that when the futures index is higher than the spot index, the non-trading effect becomes less obvious. The possible reason is that when there is a positive spread in index futures, investors will expect a bull market, thus reducing the hedging demand of index futures. In the end, we find that the liquidity in the after-hours trading session is poor, resulting in high hedging costs, and forcing investors to hedge during the regular trading period. Therefore, the after-hours trading of TAIEX Futures fails to reduce the non-trading effect.

Keywords

• non-trading effect
• hedging demand
• arbitrage
• after-hour trading