Common deviation and regime-dependent dynamics in the index derivatives markets

Journal of Futures Markets

Yang

2015

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This study demonstrates that the basic properties predicted by one-dimensional diffusion option pricing models are often violated, even in a highly liquid and leading options market. We analyze a high-quality intraday dataset of KOSPI 200 index options, one of the most actively traded options markets in the world, and find that option prices often do not monotonically correlate with underlying prices. We also empirically show that option prices often do not change, despite changes in underlying prices, when options are heavily traded by individual investors, who are normally noisy and uninformed. Our evidence is partially consistent with the implications of demand-based option pricing models, which predict that investor demand can significantly influence option prices in the presence of limits to arbitrage.

mentioning

confidence: 72%

Tests on the Monotonicity Properties of KOSPI 200 Options Prices

Sim

Journal of Futures Markets

Yang

2015

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“…3 The high liquidity of the futures market results in little market friction and lower transaction cost for futures trading, which enables us to measure the net price effect of traded orders more accurately and with less bias 4 . In addition to the high liquidity, a balanced investor participation rate is also an important trait of the futures market, which suggests that various types of futures traders supply and provide the market liquidity 3 For the relationship between the KOSPI200 futures and options markets and the characteristics and general descriptions of the Korea's index derivatives markets, refer to Ryu (2015a), Lee et al (2015), Ryu et al (2015), Lee and Ryu (2016), Song et al (2016), Sim et al (2016), and Yang et al (2017). 4 Investors involved in equity trading in the Korean stock market are required to pay various fees such as brokerage, member, and exchange fees.…”

Section: Kospi200 Futures Marketmentioning

confidence: 99%

Comprehensive Market Microstructure Model: Considering the Inventory Holding Costs

Journal of Business Economics and Management

2017

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Abstract. The purpose of this study is to propose a structural market microstructure model and examine the intraday price and spread dynamics in a highly liquid market. We extend the model of Madhavan, Richardson, and Roomans to devise a comprehensive order indicator model that considers the order duration, order size, market liquidity, and most importantly, inventory holding costs. Our empirical analyses on the KOSPI200 futures market indicate that the inventory holding costs of liquidity suppliers explain a significant portion of model-implied spreads. Meanwhile, the duration and size of traded orders convey significant information content on the inventory holding component. Market liquidity is also an important consideration for futures traders who have to manage their inventory holding costs.

“…Bakshi et al (2000), Lin et al (2011), andWang, Huang, andKuo (2014) use intraday samples that cover only 6 months (March to August 1994, July to December 2006, and January to June 2009, respectively). 4 Previous studies on Korea's derivatives markets explain the top-tier position and significance of the KOSPI 200 options market, illustrating how option products can be used (Guo, Han, & Ryu, 2013;Kim & Ryu, 2015b;Lee, Kang, & Ryu, 2015;Lee & Ryu, 2014;Ryu, Kang, & Suh, 2015). Sim et al (2016) examine KOSPI 200 options data covering 2 years (2010-2011) and ignore recent market reforms (e.g., changes in option multipliers, regulation of speculators, and significantly increased requirements for the size of individual margin accounts), which have changed the trading environment and the composition of participating investors, possibly affecting the violation rate.…”

Section: Introductionmentioning

confidence: 99%

Option Market Characteristics and Price Monotonicity Violations

Yang

Choi

Journal of Futures Markets

2016

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This study reexamines whether option price monotonicity properties hold in a liquid market with little market friction and considers the validity of the monotonicity properties in light of option market characteristics. We confirm that option prices do not monotonically correlate with underlying spot prices and that call and put prices often increase or decrease together, indicating that the monotonicity properties are not consistent with the observed option price dynamics. The violations of monotonicity properties are associated with not only market microstructure effects, trade sizes, and option leverage but also other market characteristics such as trade direction, individual investor demand, foreign investor trading, and market volatility. Violation occurrences tend to be clustered, and their relationship with option market characteristics has not been affected by the recent market reform. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:473–498, 2017