INFORMED TRADING IN THE INDEX OPTION MARKET: THE CASE OF KOSPI 200 OPTIONS

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This study examines if informed trading is present in the index option market by analyzing the KOSPI 200 options, the most actively traded derivative product in the world. The spread decomposition model developed by Madhavan, Richardson, and Roomans (1997) is utilized and the adverse-selection cost component of the spread estimated by the model is then used as a proxy for the degree of informed trading. We find that adverse-selection costs constitute a nontrivial portion of the transaction costs in index options trading. Approximately one-third of the spread can be accounted for by information asymmetry costs. A further analysis indicates that adverse-selection costs are positively related with option delta. Our regression analysis shows that option-related variables are significantly associated with estimated information asymmetry costs, even when controlling for proxies for informed trading in the index futures market. Finally, we find the evidence that foreign investors are better informed compared to domestic investors and that domestic institutions have an edge in terms of information over domestic individuals. (C) 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1118-1146, 2008
Publisher
JOHN WILEY SONS INC
Issue Date
2008-12
Language
English
Article Type
Article; Proceedings Paper
Keywords

BID-ASK SPREAD; STOCK-PRICES; DOMESTIC INVESTORS; SECURITY PRICES; PORTFOLIO FLOWS; VOLUME; COMPONENTS; TRADERS; INFORMATION; BEHAVIOR

Citation

JOURNAL OF FUTURES MARKETS, v.28, pp.1118 - 1146

ISSN
0270-7314
DOI
10.1002/fut.20369
URI
http://hdl.handle.net/10203/90558
Appears in Collection
MT-Journal Papers(저널논문)
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