An Empirical Analysis of the Dynamic Probability of Institutional Informed Trading: Evidence from the Taiwan Futures Exchange

Abstract

This paper analyzes the informational role of institutional investors’ trading using the dynamic intraday measure of the probability of informed trading (hereafter DPIN). Using a unique account-level dataset of institutional investors from the Taiwan index futures market, we show that the DPINs of foreign institutional buy trades are significantly positively related to future market returns. Moreover, compared to using trading imbalance as the informed trading measure, we find that the DPIN provides consistent predictive power for the market volatility, particularly during intense trading periods. Overall, our results also provide support for the notion that foreign institutional traders are better informed than domestic institutional traders in the emerging markets.