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Tests on the Monotonicity Properties of KOSPI 200 Options Prices

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  • Myounghwa Sim
  • Doojin Ryu
  • Heejin Yang

Abstract

This study demonstrates that the basic properties predicted by one‐dimensional diffusion option pricing models are often violated, even in a highly liquid and leading options market. We analyze a high‐quality intraday dataset of KOSPI 200 index options, one of the most actively traded options markets in the world, and find that option prices often do not monotonically correlate with underlying prices. We also empirically show that option prices often do not change, despite changes in underlying prices, when options are heavily traded by individual investors, who are normally noisy and uninformed. Our evidence is partially consistent with the implications of demand‐based option pricing models, which predict that investor demand can significantly influence option prices in the presence of limits to arbitrage. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:625–646, 2016

Suggested Citation

  • Myounghwa Sim & Doojin Ryu & Heejin Yang, 2016. "Tests on the Monotonicity Properties of KOSPI 200 Options Prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(7), pages 625-646, July.
    • Handle: RePEc:wly:jfutmk:v:36:y:2016:i:7:p:625-646
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    Cited by:

    1. Jieun Lee & Doojin Ryu, 2019. "The impacts of public news announcements on intraday implied volatility dynamics," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(6), pages 656-685, June.
    2. Seok, Sang Ik & Cho, Hoon & Ryu, Doojin, 2019. "Firm-specific investor sentiment and daily stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    3. Chune Young Chung & Yunjae Lee & Doojin Ryu, 2017. "Do Domestic Institutional Trades Exacerbate Information Asymmetry? Evidence from the Korean Stock Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 24(4), pages 309-322, December.
    4. Ryu, Doojin & Yang, Heejin, 2017. "Price disagreements and adjustments in index derivatives markets," Economics Letters, Elsevier, vol. 151(C), pages 104-106.
    5. Doojin Ryu & Heejin Yang, 2018. "The directional information content of options volumes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(12), pages 1533-1548, December.
    6. Hyein Shim & Maria H. Kim & Doojin Ryu, 2017. "Effects of intraday weather changes on asset returns and volatilities," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 35(2), pages 301-330.
    7. Yang, Heejin & Kutan, Ali M. & Ryu, Doojin, 2019. "Volatility information trading in the index options market: An intraday analysis," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 412-426.
    8. Lee, Jaeram & Lee, Geul & Ryu, Doojin, 2018. "Difference in the intraday return-volume relationships of spots and futures: A quantile regression approach," Economics Discussion Papers 2018-68, Kiel Institute for the World Economy (IfW Kiel).
    9. Doojin RYU & Hyein SHIM, 2017. "Intraday Dynamics of Asset Returns, Trading Activities, and Implied Volatilities: A Trivariate GARCH Framework," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 45-61, June.
    10. Chun, Dohyun & Cho, Hoon & Ryu, Doojin, 2020. "Economic indicators and stock market volatility in an emerging economy," Economic Systems, Elsevier, vol. 44(2).
    11. Doojin Ryu & Robert I. Webb & Jinyoung Yu, 2023. "Who pays the liquidity cost? Central bank announcements and adverse selection," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(7), pages 904-924, July.
    12. Xingguo Luo & Doojin Ryu & Libin Tao & Chuxin Ye, 2024. "Price monotonicity violations during stock market crashes: Evidence from the SSE 50 ETF options market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(3), pages 533-554, March.
    13. Chen, Jing & Han, Qian & Ryu, Doojin & Tang, Jing, 2022. "Does the world smile together? A network analysis of global index option implied volatilities," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    14. Doojin Ryu & Doowon Ryu & Heejin Yang, 2021. "The impact of net buying pressure on index options prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(1), pages 27-45, January.
    15. Chun, Dohyun & Cho, Hoon & Ryu, Doojin, 2019. "Forecasting the KOSPI200 spot volatility using various volatility measures," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 514(C), pages 156-166.
    16. Heejeong Shin & Hyejeong Shin & Su-In Kim, 2019. "The Market Sentiment Trend, Investor Inertia, and Post-Earnings Announcement Drift: Evidence from Korea’s Stock Market," Sustainability, MDPI, vol. 11(18), pages 1-19, September.
    17. Chin‐Ho Chen, 2021. "Investor sentiment, misreaction, and the skewness‐return relationship," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(9), pages 1427-1455, September.
    18. Jungmu Kim & Yuen Jung Park, 2020. "Predictability of OTC Option Volatility for Future Stock Volatility," Sustainability, MDPI, vol. 12(12), pages 1-23, June.
    19. Doojin Ryu & Jinyoung Yu, 2021. "Informed options trading around holidays," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(5), pages 658-685, May.
    20. Yang, Heejin & Ahn, Hee-Joon & Kim, Maria H. & Ryu, Doojin, 2017. "Information asymmetry and investor trading behavior around bond rating change announcements," Emerging Markets Review, Elsevier, vol. 32(C), pages 38-51.
    21. Park, Sung Y. & Ryu, Doojin & Song, Jeongseok, 2017. "The dynamic conditional relationship between stock market returns and implied volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 482(C), pages 638-648.
    22. Jung Park, Yuen & Kutan, Ali M. & Ryu, Doojin, 2019. "The impacts of overseas market shocks on the CDS-option basis," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 622-636.
    23. Daehyeon PARK & Doojin RYU, 2021. "Forecasting Stock Market Dynamics using Bidirectional Long Short-Term Memory," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 22-34, June.
    24. Alejandro Bernales & Thanos Verousis & Nikolaos Voukelatos & Mengyu Zhang, 2020. "What do we know about individual equity options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(1), pages 67-91, January.

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