| The Effect of the Underlying Market Momentum on KOSPI 200 Index Options Market |
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Moo Sung Kim, Tae Hun Kang |
| KOSPI 200 지수옵션시장에서 모멘텀 기대의 영향 |
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김무성, 강태훈 |
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| Abstract |
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Prices of the non-redundant securities are then determined both by the supply and demand for these securities as well as limited arbitrage consideration. This paper empirically test whether past underlying market returns that can be proxy of expected returns have an influence on KOSPI 200 index option prices. Especially, because the liquidity of KOSPI 200 options market is concentrated in the nearest expiration contract and the volatility smiles are the strongest for short-term options, there is a need of examining the effect on slope and curvature of volatility smile of market momentum in the concrete. Also, we investigate the type of information which the expectations of market momentum is based on and to see if the investor`s expectations about the market momentum implied in the option market are rational. It is found that not only there are the relation between the option prices and the stock market momentum but also past stock returns exert a systematic influence on implied state price density. And, the effect of price pressure on option price is caused by the momentum of the underlying asset through investors` expectations about future stock returns and their demand for portfolio insurance. However, option prices are not affected by the higher moments of past stock returns. In regard to the type of information which the expectations of market momentum is based on and confidence of the expectations, there is relation between sign series than magnitude series and the momentum effect. Also, although the momentum information implied in option prices is statistically rational during post ten-minutes in terms of the correlation coefficient, the expectations are already reflected in option market price. Therefore, to implement momentum strategies, traders may be better off using the futures contracts or underlying stocks, instead of options, to place bets on further stock-market advances. |
| Key Words:
모멘텀,변동성스마일,여분자산,합리적 기대,Implied Volatility Smile,KOSPI 200 지수옵션,KOSPI 200 Index Options,Market Momentum,Rational Expectation,Redundant Asset |
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