Market Reform and Efficiency: The Case of KOSPI200 Options

ABSTRACT

The Korean government and exchange have identified a need to regulate excessive speculative trading and to protect domestic individual investors from foreign and professional traders. As such, they have proposed an options market reform that requires higher levels of margin accounts for options trading and that increases the basic options multipliers in the KOSPI200 options market. This study examines how this market reform affects the price disagreement and adjustment behaviors of the index options market. Our analyses indicate that the efficiency and information quality of out-of-the-money options trades have increased since the reform took effect.

KEY WORDS:

• KOSPI200 options
• market efficiency
• market reform
• price adjustment
• price disagreement

JEL CLASSIFICATION:

• G13
• G14

Notes

1. The government policy and regulation have significantly affected the dynamics of the Korean financial market (Lee, Ryu, and Kutan 2016; Stiglitz 1993).

2. For the liquidity and characteristics of the KOSPI200 options market, refer to the studies of Han, Kutan, and Ryu (2015), Kim, Park, and Ryu (2018), Lee, Kang, and Ryu (2015), Lee and Ryu (2014), and Song, Ryu, and Webb (2016, 2018).

3. To avoid tainting the comparisons, we exclude the data for June 2012 for the robustness check. The significance and the magnitudes of the estimates remain essentially unchanged and our interpretations are not changed.

Additional information

Funding

This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea [NRF-2017S1A5A2A01025583].