Which Traders Contribute Most to Price Discovery? Evidence from the KOSPI 200 Options Market

ABSTRACT

We examine which group of investors—individuals, institutions, or foreigners—has more information about the true price process in the Korea Stock Price Index 200 (KOSPI 200) options market. Using the Hasbrouck (1995) information share and the Gonzalo and Granger (1995) common factor weight approach, we show that foreigners are the most informative about the efficient price process, and domestic institutional investors as well as individual investors have small contribution to price discovery. This result holds firmly, even after controlling for the effects of trading volume and the number of trades. Our empirical results suggest that foreigners are informed traders in the KOSPI 200 options market, consistent with the findings of Ahn, Kang, and Ryu (2008).

KEY WORDS:

• informed investor
• options market
• price discovery
• vector error correction model

Notes

1. Yan and Zivot (2010) analyze the two measures and discuss the possibility that using only one of them can miss important aspects of price discovery.

2. We thank Joel Hasbrouck for sharing his program codes and description publicly. Further details of the estimation procedure can be found on his homepage (http://people.stern.nyu.edu/jhasbrou).