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Open Access
Article
Publication date: 28 February 2019

Tae-Hun Kang

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…

51

Abstract

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.

Details

Journal of Derivatives and Quantitative Studies, vol. 27 no. 1
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 31 May 2012

Sun-Joong Yoon and So Hyun Kang

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…

6

Abstract

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.

Details

Journal of Derivatives and Quantitative Studies, vol. 20 no. 2
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 30 November 2007

Sol Kim

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…

22

Abstract

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.

Details

Journal of Derivatives and Quantitative Studies, vol. 15 no. 2
Type: Research Article
ISSN: 2713-6647

Keywords

Article
Publication date: 26 June 2009

Sol Kim, In Joon Kim and Seung Oh Nam

The purpose of this paper is to examine the price discovery role of the Korea Composite Stock Price Index 200 (KOSPI 200) stock index options market in contrast to other developed…

1415

Abstract

Purpose

The purpose of this paper is to examine the price discovery role of the Korea Composite Stock Price Index 200 (KOSPI 200) stock index options market in contrast to other developed options markets.

Design/methodology/approach

The price discovery roles of the stock and options markets using the error‐correction model derived from the co‐integration relationship are examined. Various analyses are conducted. First, Heston's stochastic volatility option pricing model is employed to confirm its usefulness, and compare the results with the Black and Scholes (BS) model. Second, whether the out of the money (OTM) options purchased by individual investors have a stronger price discovery role than options with other moneyness is examined. Finally, whether options have a stronger price discovery role in bullish or bearish markets than in normal markets is tested.

Findings

It is found that stock index prices lead implied index prices estimated from option prices using both BS and Heston models. In regards to the OTM options, the lead‐effect of real stock index to implied index prices holds. Also it is shown that there is a weak rise in the lead effect of the options to the stock index, but the lead effect of stock index market rules over that of the options market.

Originality/value

The paper examines the price discovery role of the KOSPI 200 stock index options market in contrast to other developed options markets and the results indicate that the consensus on the Korean financial markets may be incorrect.

Details

International Journal of Managerial Finance, vol. 5 no. 3
Type: Research Article
ISSN: 1743-9132

Keywords

Open Access
Article
Publication date: 31 August 2015

Byungwook Choi

This study examines put-call-futures parity in KOSPI 200 index futures and options markets for the sampling period between January of 2011 and December of 2013 in order to…

37

Abstract

This study examines put-call-futures parity in KOSPI 200 index futures and options markets for the sampling period between January of 2011 and December of 2013 in order to investigate whether option multiplier increasing affects on the arbitragee efficiency of an index option market and permanent relationship between futures and options markets by analyzing minute by minute historical index option and future intraday trading data.

What we find is that the arbitrage opportunities associated with put-call-futures parity increase to 5.16% from 1.75% after increasing option multiplier. Although there is no significant change of discrepancies in ATM options, a slight decrease of mispricing is found in the moneyness where call option is OTM. It turns out, however, that the arbitrage opportunities increase by 3.4 times in the moneyness below 0.97 or above 1.03, after increasing multiplier. Also ex-ante analysis shows that most of arbitrage opportunities disappear within one minute, but the speed of dissipation becomes to decrease in the moneyness where the liquidity of ITM options declines to be a very low level. Overall our results suggest that the arbitrage efficiency in the KOSPI 200 index option markets might be deteriorated after an increasing of option multiplier.

Details

Journal of Derivatives and Quantitative Studies, vol. 23 no. 3
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 31 August 2015

Tae-Hun Kang and Myung-Chul Lee

This paper examines the martingale restriction for the KOSPI 200 index options market. And in cases of the rejections, we investigate the relative market efficiency between stock…

19

Abstract

This paper examines the martingale restriction for the KOSPI 200 index options market. And in cases of the rejections, we investigate the relative market efficiency between stock index and stock index options market, using approximate entropy (ApEn) method proposed by Pincus (1994), which quantifies a complexity, irregularity and unpredictability in time series. The empirical results of this study clearly reject the martingale restriction and regression analyses indicate that the historical returns of underlying index can explain about 25% of the price differences between option-implied and market index prices but the total trading volume can explain only a small portion of the price differences. These results have cast doubt on the informational efficiency of this market. Comparing the relative market efficiency based on ApEn have showed that the complexity or irregularity of KOSPI 200 index is larger than the index options during the entire sample period. But, Examining separately ApEn of the magnitude and the sign time series which compose log-returns document that stock index options market reflect more efficiently the information about the direction of price changes than the stock index market in 2014 and the efficiency of the index options market about the directional information may be affected by directional traders who prefer certain strategies designed by exploiting past stock market movements.

Details

Journal of Derivatives and Quantitative Studies, vol. 23 no. 3
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 30 November 2009

Byung Jin Kang, Sohyun Kang and Sun-Joong Yoon

This study examines the forecasting ability of the adjusted implied volatility (AIV), which is suggested by Kang, Kim and Yoon (2009), using the horserace competition with…

26

Abstract

This study examines the forecasting ability of the adjusted implied volatility (AIV), which is suggested by Kang, Kim and Yoon (2009), using the horserace competition with historical volatility, model-free implied volatility, and BS implied volatility in the KOSPI 200 index options market. The adjusted implied volatility is applicable when investors are not risk averse or when underlying returns do not follow a normal distribution. This implies that AIV is consistent with the presence of risk premia for other risk such as volatility risk and jump risk. Using KOSPI 200 index options, it is shown that the AIV outperforms other volatility estimates in terms of the unbiasedness for future realized volatilities as well as the forecasting errors.

Open Access
Article
Publication date: 30 November 2015

Dam Cho

This paper analyzes implied volatilities (IVs), which are computed from trading records of the KOSPI 200 index option market from January 2005 to December 2014, to examine major…

58

Abstract

This paper analyzes implied volatilities (IVs), which are computed from trading records of the KOSPI 200 index option market from January 2005 to December 2014, to examine major characteristics of the market pricing behavior. The data includes only daily closing prices of option transactions for which the daily trading volume is larger than 300 contracts. The IV is computed using the Black-Scholes option pricing model. The empirical findings are as follows;

Firstly, daily averages of IVs have shown very similar behavior to historical volatilities computed from 60-day returns of the KOSPI 200 index. The correlation coefficient of IV of the ATM call options to historical volatility is 0.8679 and that of the ATM put options is 0.8479.

Secondly, when moneyness, which is measured by the ratio of the strike price to the spot price, is very large or very small, IVs of call and put options decrease days to maturity gets longer. This is partial evidence of the jump risk inherent in the stochastic process of the spot price.

Thirdly, the moneyness pattern showed heavily skewed shapes of volatility smiles, which was more apparent during the global financial crises period from 2007 to 2009. Behavioral reasons can explain the volatility smiles. When the moneyness is very small, the deep OTM puts are priced relatively higher due to investors’ crash phobia and the deep ITM calls are valued higher due to investors’ overconfidence and confirmation biases. When the moneyness is very large, the deep OTM calls are priced higher due to investors’ hike expectation and the deep ITM puts are valued higher due to overconfidence and confirmation biases.

Fourthly, for almost all moneyness classes and for all sub-periods, the IVs of puts are larger than the IVs of calls. Also, the differences of IVs of deep OTM put ranges minus IVs of deep OTM calls, which is known to be a measure of crash phobia or hike expectation, shows consistent positive values for all sub-periods. The difference in the financial crisis period is much bigger than in other periods. This suggests that option traders had a stronger crash phobia in the financial crisis.

Details

Journal of Derivatives and Quantitative Studies, vol. 23 no. 4
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 31 August 2011

Byungwook Choi

This study investigates a forecasting power of volatility curvatures and risk neutral densities implicit in KOSPI 200 option prices by analyzing minute by minute historical index

39

Abstract

This study investigates a forecasting power of volatility curvatures and risk neutral densities implicit in KOSPI 200 option prices by analyzing minute by minute historical index option intraday trading data from January of 2007 to January of 2011. We begin by estimating implied volatility functions and risk neutral price densities based on non-parametric method every minute and by calculating volatility curvature and skewness premium. We then compare the daily rate of return of the signal following trading strategy that we buy (sell) a stock index when the volatility curvature or skewness premium increases (decreases) with that of an intraday buy-and-hold strategy that we buy a stock index on 9:05AM and sell it on 2:50PM. We found that the rate of return of the signal following trading strategy was significantly higher than that of the intraday buy-and-hold strategy, which implies that the option prices have a strong forecasting power on the direction of stock market. Another finding is that the information contents of option prices disappear after three or four minutes.

Details

Journal of Derivatives and Quantitative Studies, vol. 19 no. 3
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 31 August 2009

Byungwook Choi

The purpose of this paper is to examine the argument that the put options traded in the exchanges are too high, compared to the asset prices based on the classical CAPM model, and…

20

Abstract

The purpose of this paper is to examine the argument that the put options traded in the exchanges are too high, compared to the asset prices based on the classical CAPM model, and thus the short position of the put option would make a significant profit from trading. In order to explore the earlier report, this paper, using the KOSPI 200 index options market price, estimates the historical rate of return on several option trading strategies such as naked option, protective put, covered call, straddle, and strangle. Secondly this paper compares the historical rates of return on the option trading strategies and Sharpe ratios with those generated by Monte-Carlo simulation and examines whether the historical option returns are inconsistent with Black-Scholes model, Jump-diffusion model, Stochastic Volatility model, or Stochastic Volatility with Jump model. Thirdly, this paper computes the optimal asset allocation ratio among the risk-free asset, risky assets, and option trading strategies in the viewpoint of rational investors who maximize the CRRA utility function.

The results show that the historical returns on short position of ATM and OTM puts are too high to explain based on the classical CAPM, and the optimal allocation ratios among put, risky asset, and the risk-free asset are different from those derived using Monte-Carlo simulation.

Details

Journal of Derivatives and Quantitative Studies, vol. 17 no. 3
Type: Research Article
ISSN: 2713-6647

Keywords

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