The Impacts of Individual and Institutional Trading on Futures Returns and Volatility: Evidence from Emerging Index Futures Markets

Abstract

This study examines the impacts of individual and institutional futures trading on both futures returns and volatility using a unique dataset from the Taiwan Futures Exchange. Our findings reveal that trading by individual investors tends to poorly forecast returns and raise market volatility, whereas trading by institutional investors generally forecasts returns more accurately while also reducing market volatility. In particular, the effects of extremely bullish and bearish trading on returns are found to be greater than those arising from normal trading. Further analysis reveals that foreign institutional trading provides stronger and more accurate evidence on futures return predictability than that of domestic institutional investors, although the stabilizing effect of domestic institutional trades is found to be much greater than that of foreign institutional trades. Our results provide support for the argument that institutional investors are better informed, while individual investors are likely to be noise traders, thereby implying the existence of informed trading in the emerging retail‐investor‐dominated Taiwan index futures markets. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:222–244, 2015

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