Foreign investment, regulation, volatility spillovers between the futures and spot markets: Evidence from Taiwan

Wen Hsiu Kuo, Hsinan Hsu, Min-Hsien Chiang

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

The purpose of this article is to investigate the impact of the introduction of foreign investments on the information transmissions between the futures and spot markets in terms of volatility spillovers when macroeconomic factors are controlled in emerging futures markets. We find evidence of significant bi-directional volatility spillovers across the two markets, but volatility spillovers from the futures to spot markets are stronger than vice versa following the opening up of Taiwan's futures markets to foreign investments. This pattern suggests that the futures market leads the spot market in order to incorporate the arrival of new information after the liberalization and deregulation policies have been adopted in Taiwan futures markets. The volatility transmission mechanism is asymmetric in some instances, suggesting that the spot market has become more sensitive to innovations originating in futures market after the foreign investments (FIs) are introduced in the local futures market. Overall, these results document that increased participation of FIs in emerging futures market may enhance the rate of information flow and improve the quality and reliability of information transmissions of the local futures market, supporting that deregulation is appropriate.

Original languageEnglish
Pages (from-to)421-430
Number of pages10
JournalApplied Financial Economics
Volume18
Issue number5
DOIs
Publication statusPublished - 2008 Mar 1

Fingerprint

Futures markets
Volatility spillover
Taiwan
Spot market
Foreign investment
Information transmission
Deregulation
Market volatility
Volatility transmission
Information flow
Macroeconomic factors
Innovation
Liberalization
Transmission mechanism
Participation

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Cite this

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Foreign investment, regulation, volatility spillovers between the futures and spot markets : Evidence from Taiwan. / Kuo, Wen Hsiu; Hsu, Hsinan; Chiang, Min-Hsien.

In: Applied Financial Economics, Vol. 18, No. 5, 01.03.2008, p. 421-430.

Research output: Contribution to journalArticle

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