The Change of Liquidity Premium Caused by a New Multiplier Regulation in the KOSPI200 Index Options Market

Kim, Dowan; Kim, Baeho

doi:2017.46.5.1001

Korean J Financ Stud > Volume 46(5); 2017 > Article

Korean Journal of Financial Studies 2017;46(5):1001-1032.
DOI: https://doi.org/10.26845/KJFS.2017.12.46.5.100 Published online December 31, 2017.

The Change of Liquidity Premium Caused by a New Multiplier Regulation in the KOSPI200 Index Options Market

Dowan Kim, Baeho Kim

옵션 거래 승수 인상에 따른 유동성 및 프리미엄의 변화

김도완, 김배호

고려대학교

Abstract

KOSPI200 index options market has experienced a substantial liquidity decline after the Financial Services Commission raised the option multiplier to KRW 500,000 (equal to five times prior multiplier) to enhance financial prudence by limiting excessive speculation of retail investors. We examined the impact of the new regulation on the liquidity premium implied by the KOSPI200 index option prices. We find that volatility spread, defined as the discrepancy between the option-implied volatility and the realized volatility of KOSPI200 index, shows a significant inverse relationship against the liquidity premium required by options investors in the market. The volatility spread faced a dramatic contraction grounded by the increase of liquidity premium after the implementation of new regulation. The expansion of liquidity premium became more pronounced for put options rather than call options, as the new multiplier regulation shrank both supply and demand. Risk managers subsequently encountered a difficulty to utilize index put options for their hedging purposes during the period of new multiplier regulation.

Key Words: 옵션 거래 승수,유동성 프리미엄,KOSPI200 옵션시장,옵션가격결정,변동성 스프레드,Options Multiplier Regulation,Liquidity Premium,KOSPI200 Optioins Market,Option Pricing,Volatility Spread