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Tests on the Monotonicity Properties of KOSPI 200 Options Prices
Author(s) -
Sim Myounghwa,
Ryu Doojin,
Yang Heejin
Publication year - 2016
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21763
Subject(s) - economics , arbitrage , econometrics , monotonic function , valuation of options , financial economics , index (typography) , mathematics , computer science , mathematical analysis , world wide web
This study demonstrates that the basic properties predicted by one‐dimensional diffusion option pricing models are often violated, even in a highly liquid and leading options market. We analyze a high‐quality intraday dataset of KOSPI 200 index options, one of the most actively traded options markets in the world, and find that option prices often do not monotonically correlate with underlying prices. We also empirically show that option prices often do not change, despite changes in underlying prices, when options are heavily traded by individual investors, who are normally noisy and uninformed. Our evidence is partially consistent with the implications of demand‐based option pricing models, which predict that investor demand can significantly influence option prices in the presence of limits to arbitrage. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:625–646, 2016