Doojin Ryu

Which trader's order-splitting strategy is effective? The case of an index options market

This study extends the recent study by Chae and Lee (2011) who empirically examine order-splitting and stealth-trading behaviours in the Korea Stock Price Index 200 (KOSPI200) options market, which is the single most liquid derivative market in the world. By analysing the high-quality data set, which identifies and describes all investors in the options market, we find that split orders submitted by institutional investors are substantially informative, whereas those of domestic individuals negatively contribute to the price discovery process. The inferiority of the order-splitting strategies of these individuals is more prominent when they trade deep Out-of-The-Money (OTM) options.

Implied Volatility Index of KOSPI200: Information Contents and Properties

This paper investigates the properties and information contents of an implied volatility index based on Koreas index options contract, which is the most liquid options product in the world. Analyzing the recent 100-month-long volatility index series (VKOSPI; Volatility Index of KOSPI200) constructed using the KOSPI200 index and options prices, we measure the in-sample and out-of-sample forecasting performances of the implied volatility index and examine its quality as a market volatility indicator. The VKOSPI exhibits an asymmetric volatility response to positive and negative return shocks and has a significantly positive effect on the explanatory power of nested GARCH models. Though the VKOSPI provides slightly biased forecasts, as other risk-adjusted volatility measures also do, it outperforms the Black-Scholes implied volatility, the RiskMetrics approach, and the GJR-GARCH model (which generally shows the best in-sample performance among the GARCH-family models) in forecasting future realized volatilities.

Asymmetric and negative return-volatility relationship: the case of the VKOSPI

ABSTRACT KOSPI 200 index options are the most actively traded exchange-listed derivative contracts in the world. And, unlike most other active options markets, trading is dominated by individual investors. This study examines the short-term relationship between stock market returns and implied volatility in the Korean financial market using high frequency data on the recently introduced volatility index (VKOSPI) implied by KOSPI 200 options. We find a strong asymmetric and negative return-volatility relationship at both the daily and intraday levels, which cannot be explained by either leverage or volatility feedback hypotheses on the asymmetric volatility phenomenon. Moreover, we also find that the asymmetric relationship is more pronounced for extremely negative stock market returns. We conjecture that behavioral factors better explain the observed asymmetric return-volatility relationship.

Corporate Vulnerability Index as a Fear Gauge? Exploring the Contagion Effect between U.S. and Korean Markets

The nature and extent of financial contagion across international borders is an important yet unsettled subject. In this article, Kim, Ryu, and Seo explore transmission of credit risk from the U.S. stock market to Korean markets for stock, equity futures, and volatility. U.S. credit risk is measured using a new index, the CVI computed by the Risk Management Institute at the National University of Singapore, which is designed to capture a firm’s risk of default within the next year. One key question is whether the linkage between markets is a direct one from trading, or an indirect one operating through the transfer of information. The article shows that a shock to the CVI for S&P 500 Index stocks has a highly significant influence on the KOSPI 200, KOSPI 200 futures, and the VKOSPI volatility index. Both a direct impact largely from trading by foreign investors and also an informational impact from the release of the CVI are independently significant.

The profitability of day trading: An empirical study using high-quality data

ABSTRACT This study investigates the profitability and characteristics of day trading in the KOSPI 200 futures market, one of the largest and most remarkable index futures markets in the world. By using a high-quality data set that classifies various investors into a number of key categories and provides detailed information on their identity, we find that domestic individuals face substantial losses from day trading and that individual day traders who trade more frequently and heavily are more likely to suffer such losses. In contrast to individual day traders, who account for the largest portion of total day trading activity but perform poorly, domestic money managers and foreign institutional investors generally make substantial profits through day trading, which is noteworthy in that their day trading activity accounts for only a small portion of total day trading activity in the futures market.

Effect of the subprime mortgage crisis on a leading emerging market

This study examines how the US subprime mortgage crisis affects the behaviour of the Korean stock and futures market and how the futures traders react to the shocks related to the crisis. Analysing a unique and high-quality daily data set on the ABX subprime index of the United States, Koreas implied volatility index (VKOSPI), and the KOSPI200 index and futures, we find a significant linkage and contagion effect between the US subprime market and the Korean market during the crisis period. However, the explanatory power of the ABX index return dissipates during the period of the recovery (after 2010). Our analysis, based on unique information about the types of futures traders, indicates that foreign investors are quite sensitive to the subprime shocks, whereas domestic investors are not. Furthermore, the empirical findings indicate that domestic individual investors invest their money in the opposite direction of the ABX indexs movement during the subprime crisis period.

Spread and depth adjustment process: an analysis of high-quality microstructure data

This study examines liquidity dynamics by observing changes in bid-ask spreads and market depths in response to new information and trading activities. By analysing high-quality data from the KOSPI200 futures market, we determine that spread and depth effectively adjust to new information and trading activities. Our empirical results indicate that the size of the equilibrium spread is positively related to trade frequency, the degree of informed trading, volatility and the relative portions of individual trades, and negatively related to trade size. We also find that equilibrium depth is positively associated with the trade frequency and volatility, and negatively associated with the informed trading.

The volatility index and style rotation: Evidence from the Korean stock market and VKOSPI

ABSTRACT We investigate whether changes in the implied volatility index (VKOSPI) of the Korean market have predictive power for daily market returns. We find that future returns on large stocks are higher than those on small stocks on days that follow an increase in the VKOSPI. Additionally, we find that future returns on growth stocks are larger than those on value stocks on days following an increase in the VKOSPI. We also provide empirical evidence that a potential trading rule based on changes in the VKOSPI might be profitable. Our findings indicate that the VKOSPI can be used in predicting the performance of large/small and value/growth stocks in practice.

Market overreaction and investment strategies

We investigated the overreaction of the Korean market in response to shocks in the US stock market, and analysed the dynamic relationship between these two markets since 1996. We found that the KOSPI 200 index futures overreacted to the S&P 500 index returns during the period from 2000 to 2009 when the Korean market was in its growth stage. As the Korean market matured and the KOSPI 200 overnight futures were introduced in 2009, the overreaction disappeared. When investors employed the Kelly model or Value-at-Risk to exploit the overreaction, their trading strategies produced significant profits during the growth stage even after considering transaction costs and risk, but the profits attenuated once the overnight futures market was launched in 2009.

Information content of inter-transaction time: A structural approach

This study examines the information role of inter-transaction time by employing a structural market microstructure model. By analyzing the intraday data of the KOSPI200 futures market, we find that the inter-transaction time (i.e., time between two consecu- tive trades) reveals significant information, and that fast trading is indicative of informed trading. This result remains robust when the effect of trade size is incorporated into the model. Our regression analysis indicates that the information role of inter-transaction time becomes more important when informed trading is less concentrated, liquidity is lower, and the market is more volatile.