Do foreign institutional traders have private information for the market index? The aspect of market microstructure

We investigate whether foreign institutional investors possess private information in index futures trading based upon six-year market index futures transaction data on the Taiwan Futures Exchange (TAIFEX). According to the French and Roll (1986) 'decomposition of price formation', our empirical results rule out the possibility that volatility dynamics are driven by public information and mispricing, since the findings indicate that private information proxied by information-related intraday patterns of volatility and bid-ask spread would be the major cause of price variations. A test of the information hypothesis of Schlag and Stoll (2005) provides further support for the existence of private information in foreign institutional trading. Finally, when calculating the cumulative return for foreign institutional traders from detailed account-by-account trading data, the conclusions drawn from our empirical analysis remain unchanged.