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Stock Index Futures Prices and the Asian Financial Crisis *
Author(s) -
HASSAN TAUFIQ,
MOHAMAD SHAMSHER,
ARIFF MOHAMAD,
NASSIR ANNUAR MD
Publication year - 2007
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/j.1468-2443.2007.00071.x
Subject(s) - financial crisis , futures contract , market liquidity , index (typography) , economics , financial economics , kuala lumpur , herding , monetary economics , stock market index , business , stock market , paleontology , horse , marketing , forestry , world wide web , computer science , biology , macroeconomics , geography
This study reports new findings on the behavior of index futures (FKLI: code name of Kuala Lumpur Index Futures contract) prices and also records the effect of a major financial crisis on the prices. Since the inception of trading in 1995, the FKLI has been selling at a discount, which gradually increased till early 1997; further, at the onset of the financial crisis in July 1997, FKLI prices were at a high premium relative to its theoretical values. This significant mispricing of the contract declined after the initial overreaction to the crisis. Herding behavior during crisis, liquidity constraint and imposition of trading restrictions are some plausible explanations for the mispricing. This study also investigates whether trades by foreign investors had any impact when compared with prices by domestic investors. We find that foreign investors had a negative influence on permanent price changes while the domestic investors had a positive effect.