The lead-lag relationship between stock index options and the stock index market: Model, moneyness, and news
AbstractPurpose – The purpose of this paper is to examine the price discovery role of the Korea Composite Stock Price Index 200 (KOSPI 200) stock index options market in contrast to other developed options markets. Design/methodology/approach – The price discovery roles of the stock and options markets using the error-correction model derived from the co-integration relationship are examined. Various analyses are conducted. First, Heston's stochastic volatility option pricing model is employed to confirm its usefulness, and compare the results with the Black and Scholes (BS) model. Second, whether the out of the money (OTM) options purchased by individual investors have a stronger price discovery role than options with other moneyness is examined. Finally, whether options have a stronger price discovery role in bullish or bearish markets than in normal markets is tested. Findings – It is found that stock index prices lead implied index prices estimated from option prices using both BS and Heston models. In regards to the OTM options, the lead-effect of real stock index to implied index prices holds. Also it is shown that there is a weak rise in the lead effect of the options to the stock index, but the lead effect of stock index market rules over that of the options market. Originality/value – The paper examines the price discovery role of the KOSPI 200 stock index options market in contrast to other developed options markets and the results indicate that the consensus on the Korean financial markets may be incorrect.
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Bibliographic InfoArticle provided by Emerald Group Publishing in its journal International Journal of Managerial Finance.
Volume (Year): 5 (2009)
Issue (Month): 3 (July)
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Web page: http://www.emeraldinsight.com
Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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- Suk Joon Byun & Dong Woo Rhee & Sol Kim, 2011. "Intraday volatility forecasting from implied volatility," International Journal of Managerial Finance, Emerald Group Publishing, vol. 7(1), pages 83-100, February.
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