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

Jaeram Lee, Jangkoo Kang and Doojin Ryu

Pacific-Basin Finance Journal, 2015, vol. 33, issue C, 1-22

Abstract: We analyze high-quality intraday data for KOSPI 200 futures and options to examine a common deviation and regime-dependent price dynamics in the index derivatives markets according to reliability of the common deviation. We find common deviation in the futures and options markets. In terms of the dynamics of asset prices and trading volumes, the linkage between the derivatives (i.e., futures and options) markets is stronger than the relationship between the underlying stock market and the derivatives markets. Whereas the deviations between the derivatives markets and the stock market exhibit an inverted U-shaped intraday pattern, the pattern of the deviation between futures and options markets is relatively flat. The deviations between the derivatives markets and the stock market are tied to trading activities in the same direction. When we identify regimes based on the difference between deviations in derivatives markets, defined as the relative deviation, the common deviation is significantly corrected only when the relative deviation is moderate. Although the stock market does not lead the derivatives markets when the relative deviation is mild, there is a bi-directional information flow between the derivatives markets and the stock market with extreme relative deviation. The result is still consistent in subsample analysis, though we find the informational effect of stocks becomes faint over time. A sudden change in the relative deviation is induced by options trading rather than futures trading.

Keywords: Intraday analysis; KOSPI 200 futures and options; Mispricing; Price dynamics; Regime-dependent model (search for similar items in EconPapers)
JEL-codes: G13 G14 G15 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:33:y:2015:i:c:p:1-22

DOI: 10.1016/j.pacfin.2015.02.001

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