Abstract

This study investigates the information content of open interest, using the index futures traded on the Taiwan market. We find that open interest reflects market participation, hedging demand and divergences in traders’ opinions. Evidence shows that increases in open interest are accompanied by greater trading volume, larger depth, and lower market impact costs, indicating that higher open interest represent more market participation, which enhances liquidity. The hedging demand hypothesis is supported by the findings of significantly positive relationships between open interest and three spot volatility proxies. We also find asymmetric effect of upward versus downward open interest to trading volume, as well as to depth imbalance between buy- and sell-side of the order book. Results are consistent with the hypothesis that a large open interest signifies divergence in traders’ opinions.  

Keywords

open interestinformation contentmarket liquidity