Abstract
After the financial crisis in 2008, US Federal Reserve adopted quantitative easing monetary policy to boost the US economy. However, the hot money made tremendous shocks in financial markets. After 2015, the US job market stabilized and the Fed ended the QE and started raising interest rates. The aim of this study is to show that institutional investors affect TAIEX futures through MSCI Taiwan Index Futures, and consequently affect Taiwan 50 ETF. This study incorporates the price spread of TAIEX futures and MSCI Taiwan Index Futures in the model to conduct backtesting using program trading. This can help us determine if the mean reversion model is better than the contrarian model and the momentum model. The results show that the mean reversion model has higher profits and stabilities than the contrarian and momentum models. The results suggest that incorporating the price spread of TAIEX futures and MSCI Taiwan Index Futures and utilizing the mean reversion property of behavioral finance can enhance trading performance.
Highlights
After the 2008 financial crisis, the US Federal interest rate was near zero
The results show that when lagging one period, the TAIEX futures lead the average Cumulative abnormal return (CAR) of Taiwan 50 ETF
The price spread between TAIEX futures and MSCI Taiwan Index Futures is included in the model to conduct backtesting using program trading
Summary
After the 2008 financial crisis, the US Federal interest rate was near zero. This suggested that the traditional monetary policy was no longer useful in solving economic problems. QE2 had the size of around US$600 billion, which had mainly been used to buy long-term Treasury bonds. The money was printed to buy mortgage-backed securities (MBS), Treasury long-term notes, US government bonds and agency MBS. The purpose was to raise the price of long-term US bonds and lower interest rates. This could lower the mortgage interest rates and provide support for the housing market
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