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The Information Content of Trades: An Analysis of KOSPI 200 Index Derivatives

Authors

  • Doojin Ryu

    Corresponding author
    1. Doojin Ryu is at the, College of Economics, Sungkyunkwan University, Jongno-gu, Seoul, Republic of Korea [Correction added on 19 December 2014, after first online publication: the affiliation “Financial Economics at the School of Economics, Chung–Ang University, Seoul, Republic of Korea” was changed to “College of Economics, Sungkyunkwan University, Jongno–gu, Seoul, Republic of Korea”]
    • Correspondence author, College of Economics, Sungkyunkwan University, 25-2, Sungkyunkwan-ro, Jongno-gu, Seoul 110-745, Republic of Korea. Tel: +82-2-760-0429, Fax: +82-2-760-0950, e-mail: doojin.ryu@gmail.com

      [Correction added on 19 December 2014, after first online publication: the affiliation “Financial Economics at the School of Economics, Chung–Ang University, Seoul, Republic of Korea” was changed to “College of Economics, Sungkyunkwan University, Jongno–gu, Seoul, Republic of Korea. Tel: +82-2-760-0429, Fax: +82-2-760-0950”].

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  • The author is grateful for the helpful comments and suggestions from an anonymous referee, Changhui Kang, and Robert I. Webb (the editor).

Abstract

This study examines and compares the information content of futures and options trades by analyzing the transaction dataset of derivatives underlying the KOSPI 200 index. This dataset contains detailed information about investor types and trade directions. Previous market microstructure studies of Korea's index derivatives market (i.e., KOSPI 200 futures and options market) may contain model biases and microstructure errors because they depend on structural models and/or they focus on infinitesimal price changes between consecutive trades. In an effort to improve upon previous works, we use the simple regression approach described by Schlag and Stoll (2005, Price impacts of options volume. Journal of Financial Markets, 8, 69–87) and examine the information content of trades by tracing the price impacts of the trades over successive intervals of time. We find that a significant proportion of the price impact attributed to futures trades is permanent and that the price discovery effect is larger in the futures market than in the options market. Institutional futures trades are generally more informative than individual trades, and trades made by foreign institutions have the greatest permanent price impact. Examination of the intertemporal relationship between futures and options trades also indicates that the futures trades generally lead the options trades. Overall our results suggest that futures trades contribute more to price discovery than do options trades and that futures trades made by foreign institutions are most informed while those of domestic individuals are least informed. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 35:201–221, 2015

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