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臺大管理論叢
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26
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3
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153
multi-purposed usages of open interest, this study focuses on what open interest itself
reflects, in an attempt to provide more comprehensive understanding about the original
information of open interest under different market situations.
In addition to the academic attention, open interest is often used by practitioners for
technical analysis in derivatives trading. A classical example of such usage can be found in
Shaleen (1991) and Pring (2002), who forecast market price trend using parallel open
interest, trading volume and transaction price. However, when it comes to the interpretation
of open interest, practitioners sometimes apply the technical analysis rules derived for
trading volume without discriminating the difference between open interest and trading
volume.
1
The approach, though convenient, overlooks the obvious fact that change in open
interest is not always accompanied by the same direction and amount of volume change.
2
Motivated by the common uses (or misuses) of the open interest information, this study
provides evidence that clarify the information contents of open interest.
The current study analyzes the open interest of the TAIEX index futures contracts (TX).
The contract uses the value-weighted Taiwan Stock Exchange Index that consists of almost
all listed stocks (around 800 stocks) on the Taiwan Stock Exchange as the underlying index.
The TAIEX futures contract began to be listed in the Taiwan Futures Exchange (TAIFEX)
since July 21, 1998. The exchange offers quarterly contracts expired in March, June,
September, and December, begin to trade nine months before expiration, plus monthly
contracts for every remaining months, begin to trade two months prior to expiration. The
TAIFEX operates an electronic order-driven trading system (ETS). The ETS matches, in a
continuous manner, incoming market and limit orders in price and time priority rules that
maximize trading volume. Trade results are instantaneously disseminated to the crowd. The
disseminated information include traded price, trading volume, the best five bid and ask
prices, and the number of limited orders remaining on the order book for the best five ticks.
Open interest as of the end of day is reported after a regular trading session.
1 Generally, the practitioners’ reports do not provide clear explanation to open interest. They often view
open interest and trading volume similar variables and apply the same filter rules to both variables (Liou,
2004; The Investment Blog, 2008).
2 Transactions always increase volume but not necessary open interest. When both sides (long and short) in
a matched trade open new positions, the open interest increases. When both sides use the trade to offset
their opened positions, open interest is reduced. When one side open but the other side offset, the open
interest is left unchanged. Therefore, open interest could increase or decrease with volume due to
transactions. Open interest decline substantially, accompanied by large volume, when traders decide to
exit the market altogether. An example of such occasion is when a contract approaches to expiration.