Discussant: Alex P. Tang, Ph.D. and CFA Morgan State University Baltimore, MD 21251

1. Comments on “The Intraday Behavior of Information Misreaction across InvestorCategories in the Taiwan Options Market”Authors: Chuang-Chang Chang, Pei-Fang Hsieh, Chih-Wei Tang and Yaw-Huei Wang Discussant: Alex P. Tang, Ph.D. and CFA Morgan State University Baltimore, MD 21251

2. What does the paper do? • The authors use a unique dataset to examine the TAIEX options market reactions from various investor classes.

3. Why is this issue important? • Do the behavioral cues related to overreaction and under-reaction that we observe in the stock market also show up in the options market? • “The findings from the Taiwan market also have important implications for other developing markets that have similar characteristics such as a high turnover rate and a high participation rate by individual investors.”

4. Data Set • Complete record of transactions of the options written on the Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX) • Unique data set • Intraday data • Identification of investors: Foreign and domestic institutional investors, domestic individual investors and market makers

5. Methodology • Follow the analysis framework of Poteshman (2001): • generate the high-frequency series of instantaneous volatility using Heston’s (1993) stochastic volatility model. • measure investors’ misreaction to new information

6. Main Findings • Investors show both short-term under-reaction and long-term under-reaction. • Investors exhibit increasing misreaction.

7. Main Findings continues • Short-term under-reaction is the lowest among foreign institutional investors. • Long-term under-reaction is also the lowest among foreign institutional investors. • Institutional investors (both foreign and domestic) do not show increasing misreaction.

8. Major Comment 1 • Results could be driven by misspecified models. (Fama 1998) • Jiang and Tian (2010, JBF): “These studies, however, rely on implied volatilities derived from specific option pricing models and are thus subject to model specification errors. In this paper, we avoid this problem by performing new tests on options market misreaction using the model-free implied variance. ….In contrast to previous studies [e.g., Stein (1989) and Poteshman (2001)], our tests provide no evidence of short-horizon under-reaction or long-horizon overreaction to volatility shock in the options market. …We further demonstrate that the pattern of market misreaction reported in previous studies is most likely the result of model misspecification.”

9. Major Comment 2 • We know the facts. What are the implications? For example, do the mis-reactions present opportunities for profitable trading opportunities? How do you reconcile your findings with the predictions of behavioral models such as BSV model?

10. Major Comment 3 • Investor identity makes a difference. • Could investor identity signal some underlying factors such as experience and sophistication? • Han, Lee and Liu (2009, WP, UT Austin) show, on average, individual investors lose money and foreign institutions profit from trading Taiwan stock index options. But . Individual investors' trading performance improves with experience and sophistication.

11. Major Comment 4 • “We conjecture that the inexistence of long-horizon overreaction is caused by the poor liquidity of long-maturity options in the Taiwan options market.” • Does this mean you do not find what you expect to find? This needs to be further explored and explained.

12. Major Comment 5 • Do investors learn from their errors? • Dataset covers the trading dates from 2 January 2002 (beginning of index option trading in Taiwan) to 31 December 2005. • Do the same phenomena exist in the latter period?

13. Minor Comment 1 • All the tables should be self-explanatory. • All the variables should be defined in each table.

14. Minor Comment 2 • More summary statistics should be provided. Similar to Han et al., the statistics on Number of rounds per investor, Number of contracts per round, Number of trades per investor, Duration of a round in days, Number of investors, Total number of contracts traded for each investor category should be provided.

15. Minor Comment 3 • All the β0 are significantly negative in Tables 3 and 4. Is β0 for foreign institutional investors significantly different from β0 for other types of investors?

16. Conclusion Remark • I enjoy reading the paper. The paper is well written and has the potential to be published in a good international finance type of journals.