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Trading of KOSPI 200 futures on CME Globex platform, which was launched in November 2009, starts at 18:00 and closes at 05:00 in the next morning. This paper investigates the information transmission between daytime trading of KOSPI 200 futures on KRX and nighttime trading of KOSPI 200 futures on CME Globex by using GARCH (1, 1).

The main findings of this paper are summarized as followings; Firstly, the statistically significant spillover effect from open-to-close returns of KOSPI 200 Futures on Globex to the overnight returns of KOSPI 200 futures on KRX is found but not to the daytime returns. Moreover, I find the spillover effects from daytime returns of KOSPI 200 futures on KRX to close-to-open return and open-to-close return of KOSPI 200 Futures on Globex. Meanwhile, this information transmission between two markets of common underlying asset shows more strongly statistical significance during highly liquid period. Secondly, daytime traders of KOSPI 200 futures on KRX recognize the price of KOSPI 200 futures on CME Globex as more valuable information than volatility of US stock market. Overall empirical evidence suggests that KOSPI 200 futures on CME Globex has leading role in price discovery process of daytime trading of KOSPI 200 futures on KRX despite of immaturity and low liquidity.

The study examines not only the methods for eliminating stale or abnormal prices but also strategies for enhancing liquidity in the KOSPI 200 index options market, for compensating the defects of V-KOSPI 200.

First, introducing market making scheme in the KOSPI 200 options market can be the direct solution to prevent temporary fluctuations and spikes of the index arising from abnormal orders and to alleviate unnatural low variability (level) of the index through decreasing the use of stale market prices (model prices).

Second, if weekly options underlying KOSPI 200 index are available for trading and investor interest in the weeklys are surged, Korea Exchange can enhance V-KOSPI 200 to include series of KOSPI 200 weekly options. The inclusion for at least 5~6 weekly options available for trading allow V-KOSPI 200 to be calculated with KOSPI 200 index option series that most precisely match the 30-day target time-frame for expected volatility that the Index is intended to represent.

Along with these strategies for enhancing liquidity in the KOSPI 200 index options market, the study suggests the methodology which can prevents temporary fluctuations and spikes of the index by substituting stale or abnormal prices for normal prices.

Although the V-KOSPI 200 Futures markets opened in November 2014, trading has not been active until recently. One of the reasons for the illiquidity is due to the lack of a market consensus on the stochastic process model for the underlying volatility index (V-KOSPI 200). Given this fact, there is no theoretical pricing model that can be used for the determination of the benchmark price for the V-KOSPI 200 Futures. In this paper, we use the generalized method of moments method to search for a model that fits well with the time series of V-KOSPI 200 under the historical measure. In addition, we compare the performance of each model for the pricing of the V-KOSPI 200 Futures under the risk neutral measure. In the empirical analysis, we find that the CEV (constant elasticity of variance) parameter with the value about 1.5 is needed to price both the underlying V-KOSPI 200 process (under the physical measure) and the V-KOSPI 200 Futures (under the risk neutral measure). We also find that the mean reversion property is necessary to explain the dynamics of V-KOSPI 200.

This paper investigates the lead-lag relationship between the call-put options open interest value ratio and the KOSPI 200 Index returns. In addition, we tried to find whether the open interest value ratio has the information contents about KOSPI 200 Index return. When estimating call-put options open interest value ratio, we use Chen, Lung, and Tay (2005, 2009) models. The sample period covers from January 5, 1998 to December 28, 2006 with the closing price returns of KOSPI 200 Index and the open interest of the KOSPI 200 options. We use statistical methodology such as VAR (vector autoregressive model), Granger causality test, impulse response and variance decomposition model for the dynamic empirical tests.

Followings are the major findings and implications drawn from the empirical analysis of the Korean options market. Most previous researches claims that options open interest can provide the information contents to estimate the KOSPI 200 spot price movement. However, unlike the results of most previous researches, we found that the call-put options open interest value ratio does not have the information contents predicting the KOSPI 200 index return where as KOSPI 200 spot price leads the call-put options open interest value ratio.

In this paper, we make a comparison of price efficiency between the new market (KOSDAQ) and the main board (KOSPI) in the Korean stock market. More specifically, we evaluate the relative price efficiency of both markets by comparing the speed, degree and accuracy in process of intraday price discovery. Each market’s speed and degree of price discovery are measured by WPC (weighted price contribution) devised by Barclay and Warner (1993) and WPCT (weighted price contribution per trade) proposed by Barclay and Hendershott (2003), respectively. Each market’s accuracy of price discovery is measured by unbiased regression coefficient used by Biais et al. (1999). We analyze 535 KOSPI stocks and 803 KOSDAQ stocks using 1-minute-interval transaction data collected from Bloomberg. The major findings of this paper are summarized as follows: Fist, the price discovery in KOSDAQ, the new market is slower than in KOSPI, the main board. Second, the morning session’s degree of price discovery per trade in KOSDAQ is smaller than KOSPI. Finally, the price discovery in KOSDAQ is more accurate than in KOSPI. Overall, our results indicate that the prices of KOSDAQ stocks are as efficient as the prices of KOSPI stocks, thought they have smaller firm size, younger ages, and greater uncertainty in cash flow and asset value than the main board stocks do.

This paper investigates the lead-lag relationship between the call-put options trading value ratio and the KOSPI 200 returns using Chen, Lung, and Tay (2005, 2006)’s model. We report the evidence conSistent with a pooling equilibrium or that informed trades are executed in both equity and options markets when using all options. That is, KOSPI 200 index options and KOSPI 200 are closely interrelated. However, in case of using the short-term or out-of-the-money options, call-put oPtions trading value ratio uni-directionally leads KOSPI 200 index returns. Also under the volatile market condition, the lead effect of call-put options trading value ratio to KOSPI 200 index returns becomes stronger.

This paper conducts a factor analysis using the implied variances of S&P 500 index options and KOSPI 200 index options. After estimating the factors that influence variance risks, we rotate the factors to decompose them into a common factor and local factors. The results show that 10~12 percent of variance risks in both markets is explained by the common factor and 65 percent of S&P 500 implied variances and 70 percent of KOSPI 200 implied variances are explained by each local factor, which is in contrast to the results for bond markets that the most variation of interest rates could be explained by a common factor. To figure out the source of common and local factors, additionally, we adopt the regression models that incorporate the risk-neutral (RN) variance, skewness, and kurtosis as explanatory variables. Approximately, the common factor is mainly determined by the RN variance of the S&P 500 index and RN higher moments of the KOSPI 200 index. In contrast, the S&P 500 local factor is influenced by the RN variance of the S&P 500 index and the KOSPI 200 local factor is explained by the RN higher moment of the KOSPI 200 index.

This paper aims to replicate 148 anomalies and to examine whether the performance of the Korean market anomalies is statistically and economically significant. First, the authors observe that only 37.8% anomalies in the universe of the KOSPI and the KOSDAQ and value-weighted portfolios have t-statistics that exceed 1.96. When the authors impose a higher threshold (an absolute value of t-statistics of 2.78), only 27.7% of the 148 anomalies survive. Second, microcaps have large impacts. The results vary significantly depending on whether the sample included stocks in the KOSDAQ and whether value-weighted or equal-weighted portfolios are used. The results suggest that data mining explains large portion of abnormal returns. Any tactical asset allocation strategies based on market anomalies should be applied very cautiously.

The KOSPI 200 options at its initial stage generated a significant number of violations in no-arbitrage conditions which involve both options and the underlying index. However, when the arbitrage conditions are formed independent of the underlying index, the average size of violation is not large and few arbitrage opportunities exist. There are more frequent violations on near-maturity days, with in-the-money options and larger violation sizes during opening and closing hours. The arbitrage opportunities remain intact even after realistic transaction costs are taken into account and index futures prices are used instead of the stock index in an alternative specification.

The National Pension Service (NPS) of Korea suddenly announced that they would suspend their stock lending business from October 22, 2018. Using this ideal setting, the authors investigate the effects of this suspension on market quality and short-selling activities. The authors find that stock return does not increase after the suspension of stock lending for both the KOSPI and KOSDAQ markets. However, the returns of stocks with NPS ownership decline less than those without NPS ownership. The authors also find that the institutional and foreign investors' short sales did not increase in both markets after the lending business suspension by the NPS. In addition, the effect of suspension of stock lending on market quality is mixed, so the authors cannot conclude that market quality has improved. Overall, the authors’ results indicate that the stock market, especially for short-sales activity, has not been affected by the suspension of the stock lending service by the NPS.