Search results

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.