Information effects and dynamics in the Korean derivatives markets

Abstract

This thesis consists of four essays on the information effects and dynamics in the KOSPI 200 options and futures markets. The first two essays concern the information role of index options trading. The first essay examines whether informed trading is present in the index options market and whether options-related variables are significantly associated with information asymmetry costs estimated by the spread decomposition model of Madhavan, Richardson, and Roomans (1997), even when controlling for proxies for informed trading in the index futures market. The second essay examines two information-related issues; one is whether trade size is related to information content and the other is whether buy and sell transactions carry different information content. The two issues are analyzed using two structural models modified from the Madhavan et al. model (1997), the size-dependent model (SDM) and the dummy variable model (DVM). The SDM incorporates trade size in the model to estimate the magnitude of the information content of a trade. The DVM separately estimates information contents for buyer- and seller-initiated trades using a dummy variable. The third essay also investigates the information-related issues, but in the KOSPI 200 futures market. We gauge the information contents of trade-size and the investment performance by investor types using the price contribution measure proposed by Barclay and Warner (1993) and its amended measures, which are designed to alleviate the heteroskedasticity problem. An issue of whether there is an informational advantage of specific investor groups in the index derivatives markets is analyzed in these three essays, and we illustrate the empirical results of each essay in the context of the informational advantage of investors. The last essay deals with an issue on the dynamics of the KOSPI 200 options market. This essay empirically examines the performance of three model-based option valuation approaches, which are a pricing mo...