Investor Sentiment, Mispricing, and Limited Arbitrage in the Futures Market

Doojin Ryu, Doowon Ryu and Heejin Yang

Journal of Futures Markets, 2025, vol. 45, issue 8, 879-895

Abstract: We examine how investor sentiment influences KOSPI 200 futures mispricing under varying market conditions, including volatility, short‐sale restrictions, and regulatory changes. The sentiment–mispricing relationship intensifies during high volatility, as arbitrageurs face greater constraints in correcting price distortions, leading to increased mispricing. Short‐sale restrictions further amplify mispricing and the impact of pessimistic sentiment. Regulatory reforms reducing domestic trading activity also shape sentiment–mispricing dynamics, suggesting that lower participation by irrational investors enhances market efficiency. Our findings underscore the importance of market‐specific factors—arbitrage constraints and regulations—in understanding sentiment‐driven mispricing.

Date: 2025
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https://doi.org/10.1002/fut.22594

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