A stabilization analysis of the introduction of Taiwan 50 Index Futures and Taiwan Top 50 Tracker Fund on the underlying spot market

Abstract

The objective of this paper is to examine whether derivatives trading leads to destabilization effects of the underlying markets. We employ Taiwan-listed stocks and partition the sample into Taiwan 50 index constituents and non-Taiwan 50 stocks. The sample period covers from January 2001 to December 2004. Subsequently, we divide the observed period into three sub-periods and use a covariance regression model and the Sharpe measure to analyze the effect of Taiwan 50 Index Futures and Taiwan Top 50 Tracker Fund trading on spot price volatility and performance. The empirical results show that the launches of Taiwan 50 index futures and Taiwan Top 50 Tracker Fund trading not only push the volatility to further increase after controlling several firm-specific factors but also advance the performances. At the same time, Taiwan 50 Index constituents have a higher volatility than non-Taiwan 50 stocks. However, due to the huge trading volume difference, we conjecture that Taiwan Top 50 Tracker Fund is the major factor not the index futures.