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A further look at transaction costs, short sale restrictions, and futures market efficiency: The case of Korean stock index futures

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  • Gerald D. Gay
  • Dae Y. Jung

Abstract

Persistent underpricing in the Korean stock index futures market is documented and alternative explanations are examined. No‐arbitrage pricing bands are computed using alternative sets of transaction costs and short sale restrictions faced by different investor groups. We find that a substantial portion of the mispricing can be explained by these factors, though a high incidence of mispricing remains after accounting for costs faced by the marginal trader group—the KSE exchange members. We also observe frequent underpricing of futures during periods of downward market trends. This is attributed in part because of unique restrictions on short sales and accounting conventions in the Korean market. In addition, tests of alternative futures pricing models are conducted that provide mixed results. Though we do not reject the standard cost‐of‐carry model, an equilibrium pricing model provides reasonable explanatory power. Further, use of the cost‐of‐carry model does not appear to be driving the findings of persistent underpricing. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 153–174, 1999

Suggested Citation

  • Gerald D. Gay & Dae Y. Jung, 1999. "A further look at transaction costs, short sale restrictions, and futures market efficiency: The case of Korean stock index futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(2), pages 153-174, April.
    • Handle: RePEc:wly:jfutmk:v:19:y:1999:i:2:p:153-174
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    Cited by:

    1. Panayiotis Andreou & Yiannos Pierides, 2008. "Empirical investigation of stock index futures market efficiency: the case of the Athens Derivatives Exchange," The European Journal of Finance, Taylor & Francis Journals, vol. 14(3), pages 211-223.
    2. Sila Alan, Nazli & Karagozoglu, Ahmet K. & Korkmaz, Sibel, 2016. "Growing pains: The evolution of new stock index futures in emerging markets," Research in International Business and Finance, Elsevier, vol. 37(C), pages 1-16.
    3. Wu, Lei & Zeng, Hongchao, 2019. "The impact of liquidity constraints on the cash-futures basis dynamics: Evidence from the Chinese market," Economic Modelling, Elsevier, vol. 83(C), pages 96-110.
    4. Alok Dixit & Vipul & Shivam Singh, 2019. "Options pricing and short‐selling in the underlying: Evidence from India," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(10), pages 1250-1268, October.
    5. Jimmy E. Hilliard & Haoran Zhang, 2020. "The impact of soft intervention on the Chinese financial futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(3), pages 374-391, March.
    6. Tu, Anthony H. & Hsieh, Wen-Liang G. & Wu, Wei-Shao, 2016. "Market uncertainty, expected volatility and the mispricing of S&P 500 index futures," Journal of Empirical Finance, Elsevier, vol. 35(C), pages 78-98.
    7. Kristoffer Glover & Hardy Hulley, 2022. "Financially constrained index futures arbitrage," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(9), pages 1688-1703, September.
    8. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.
    9. Chris Bilson & Tim Brailsford & Twm Evans, 2005. "The International Transmission of Arbitrage Information Across Futures Markets," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5-6), pages 973-1000.
    10. Jieye Qin & Christopher J. Green & Kavita Sirichand, 2019. "Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk, and transaction costs," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(10), pages 1269-1300, October.
    11. Pham, Son Duy & Nguyen, Thao Thac Thanh & Do, Hung Xuan, 2022. "Effect of futures trading on the liquidity of underlying stocks: Evidence from Vietnam," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    12. Janchung Wang, 2009. "Stock market volatility and the forecasting performance of stock index futures," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(4), pages 277-292.
    13. Kim, Bong-Han & Chun, Sun-Eae & Min, Hong-Ghi, 2010. "Nonlinear dynamics in arbitrage of the S&P 500 index and futures: A threshold error-correction model," Economic Modelling, Elsevier, vol. 27(2), pages 566-573, March.
    14. Michael Nwogugu, 2020. "Regret Theory And Asset Pricing Anomalies In Incomplete Markets With Dynamic Un-Aggregated Preferences," Papers 2005.01709, arXiv.org.
    15. Lee, Jaeram & Kang, Jangkoo & Ryu, Doojin, 2015. "Common deviation and regime-dependent dynamics in the index derivatives markets," Pacific-Basin Finance Journal, Elsevier, vol. 33(C), pages 1-22.
    16. Hsinan Hsu & Hsing-Chi Wu & Hsien-Yi Lee & Janchung Wang, 2010. "A measurement of the extent of market imperfections between markets and applications," Applied Economics, Taylor & Francis Journals, vol. 42(16), pages 2111-2126.
    17. Jaeram Lee & Doojin Ryu, 2016. "Asymmetric Mispricing and Regime-dependent Dynamics in Futures and Options Markets," Asian Economic Journal, East Asian Economic Association, vol. 30(1), pages 47-65, March.
    18. Jieye Qin & Christopher J. Green & Kavita Sirichand, 2021. "Comment on “Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk and transaction costs” by Peter Miu and Meng‐Lan Yueh: Reply," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(12), pages 2083-2084, December.

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