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The lead‐lag relationship between stock index options and the stock index market

Author

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  • Sol Kim
  • In Joon Kim
  • Seung Oh Nam

Abstract

Purpose - 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.

Suggested Citation

  • Sol Kim & In Joon Kim & Seung Oh Nam, 2009. "The lead‐lag relationship between stock index options and the stock index market," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 5(3), pages 311-332, June.
    • Handle: RePEc:eme:ijmfpp:v:5:y:2009:i:3:p:311-332
    DOI: 10.1108/17439130910969738
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    Citations

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    Cited by:

    1. Suk Joon Byun & Dong Woo Rhee & Sol Kim, 2011. "Intraday volatility forecasting from implied volatility," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 7(1), pages 83-100, February.
    2. Sol Kim & Geul Lee, 2017. "Lead–Lag Relationship Between Returns and Implied Moments: Evidence from KOSPI 200 Intraday Options Data," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(03), pages 1-20, September.
    3. Babu Jose & James Varghese, 2021. "Ideal Investment Protection in Optimistic Perceptions: Evidence From the Indian Equity Options Market," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(2), pages 327-340, April.
    4. Doojin Ryu, 2011. "Intraday price formation and bid–ask spread components: A new approach using a cross‐market model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(12), pages 1142-1169, December.
    5. Pradhan, Rudra P. & Hall, John H. & du Toit, Elda, 2021. "The lead–lag relationship between spot and futures prices: Empirical evidence from the Indian commodity market," Resources Policy, Elsevier, vol. 70(C).
    6. Kim, Jun Sik & Ryu, Doojin, 2015. "Are the KOSPI 200 implied volatilities useful in value-at-risk models?," Emerging Markets Review, Elsevier, vol. 22(C), pages 43-64.

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