Expected volatility and mispricing in the KOSPI 200 index futures market

Abstract

Past literature has identified the concurrent volatility as a factor that contributes to mispricing in the index futures price. This thesis aims to discover the relationship between futures mispricing and expected volatility of the underlying index in the KOSPI 200 index futures market. With the VKOSPI index as a proxy for the expected volatility, this study provides the evidence of increased futures mispricing with increasing expected volatility using OLS and quantile regressions. Moreover, such relationship is non-linear in that the impact of VKOSPI grows exponentially across the distribution of conditional mispricing levels.