What Is So Special About KOSPI 200 Index Futures Contract? An Analysis of Trading Volume and Liquidity

Abstract

The Korean Stock Exchange's (KSE) KOSPI 200 Index futures and options have been the fastest growing derivatives contracts in the world in recent years. This paper presents an analysis of the factors contributing to the success, as measured by trading volume, of the KOSPI 200 Index futures contract. Both contract and market specific factors are investigated to distinguish between alternative explanations. Although contract specifications are not unusual, an analysis of variables connected to market activity indicate lack of hedging-motivated trades on Korean index futures market. Formal tests conducted within the context of a GMM-based structural model, as well as a dynamic model of price changes and trading volume, further support the contention that speculation seems to be the primary motive to trade. The findings offer insights into the surge in trading volume, which could be useful for the design and development of new derivatives contracts, especially in emerging markets.

Keywords: KOSPI 200 Index, Korea, futures contract, trading volume, volatility, bid-ask spreads, liquidity

JEL Classification: G10