The Effects Of KOSPI200 Options On Underlying Stock Index Volatility And Enlightenment To China

In recent years,the global financial derivatives market has developed rapidly,especially financial derivatives in exchange.Stock options,as one of the derivatives in exchange,had already exceeded the stock options in trading volume.Besides,stock options have the function of risk management and price discovery,and they are highly leveraged.How they can impact on the volatility of the underlying index,has been a concern for governments,academics and investors.The reason why we choose South Korea as research object is that KOSPI200 stock options attracted many investors and was successful in trading volume since its introduction in 1997.It has good market liquidity and won the first in the world by its large trading volume,which promoted Korean securities market development.Besides,the similarities between South Korea and China in the investor structure,culture and economic development,is another reason.It is meaningful to research the Korean market.We use KOSPI200 index options introduction as the time point,and make an empirical analysis.In this paper,we made three innovations in the empirical analysis.First,we chose May 3,1996 as the starting time,when KOSPI200 futures were listed,in order to exclude stock index futures' impact.Second,we add other market fluctuations variables in in the yield equation to exclude other market fluctuations on the impact of the underlying index fluctuations.Thirdly,this paper adopts the CGARCH model to decompose the volatility of the underlying index,which is divided into short-term volatility and long-term volatility,then we can study the impact of stock index listing for the long and short volatility of the underlying index respectively.The empirical results show that,under the premise of excluding other market influence,the introduction of stock options significantly increases the short-term volatility of the underlying index and reduces the long-term volatility of the underlying index.This shows that the function of stock options has been well played in the Korean market.Therefore,we suggested that China's financial markets introduce stock index derivatives to further improve China's financial markets.