Market timing skill and trading activity in Taiwan’s retail-dominated futures market
Journal
Journal of Portfolio Management
Journal Volume
47
Journal Issue
7
Date Issued
2021
Author(s)
Abstract
There has been substantial research on performance persistence among professional and retail investors. These studies typically employ infrequently sampled data on portfolio holdings and returns, making it difficult to distinguish skill from luck, let alone differentiate between superior security selection and market timing ability. Based on 10 years of comprehensive account-level data comprising 61 million trades made by investors in Taiwan’s retail-dominated futures market, the authors confirm that institutions consistently earn alpha at the expense of behaviorally biased individual traders. The authors introduce an approach for separating overconfident traders from skilled market timers. This novel skill measure interacts prior performance with past trading volume. Investors identified as highly skilled subsequently earn a net-of-cost average annual return of 115%. The authors’ results contribute in two ways: (1) introducing a new measure for assessing high-frequency trading skill and (2) validating the intuition that significant alpha can be harvested by active investors in retail-dominated markets. ? 2021 Parlar Scientific Publications. All rights reserved.
Subjects
Derivatives
Emerging markets
Futures and forward contracts
Manager selection
Performance measurement
Type
journal article