Observations on market expectations behaviour in Taiwan stock markets

An-Pin Chen*, Hsiao Ya Chiu, Chieh Chung Sheng, Yun Hsuan Huang

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference contributionpeer-review

Abstract

This study adopts derivative pricing as an indicator of market expectations, with those results suggesting that general investors can use market expectations to predict the final settlement value of underlying assets. Most investment textbooks note that one of the major functions of futures is price discovery. Similarly, the implied volatility associated with option prices can be used to discover the volatility of the underlying asset. This study combines futures price and implied volatility to establish a probability space of market expectations regarding the final settlement value of the underlying asset, and verifies this probability space using empirical data from the Taiwan stock market. The verification results suggest that market expectations closely reflect the actual behavior of the final settlement value of the underlying asset, and thus provide a practical perspective on future price behavior. According to this study, investors can easily estimate underlying asset behavior based on the behavior of the related futures and options and without incurring significant measurement error, which can be helpful in risk management and planning investment strategies.

Original languageEnglish
Title of host publicationProceedings of the 9th Joint Conference on Information Sciences, JCIS 2006
DOIs
StatePublished - 1 Dec 2006
Event9th Joint Conference on Information Sciences, JCIS 2006 - Taiwan, ROC, Taiwan
Duration: 8 Oct 200611 Oct 2006

Publication series

NameProceedings of the 9th Joint Conference on Information Sciences, JCIS 2006
Volume2006

Conference

Conference9th Joint Conference on Information Sciences, JCIS 2006
CountryTaiwan
CityTaiwan, ROC
Period8/10/0611/10/06

Keywords

  • Forecasting
  • Futures
  • Implied volatility
  • Market expectation
  • Probability space

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