A Study on the Price Discovery in Korea Stock Index Markets: KODEX200, KOSPI200, and KOSPI200 Futures

Abstract

This paper examines the price discovery process among the Korea stock index markets using the vector error correction model (VECM) and the multivariate generalized auto regressive conditional heteroskedasticity (M-GARCH) model. The minute-by-minute price series of the KOSPI200 index, KOSPI200 futures, and KODEX200 are cointegrated. The empirical results are summarized as follows: First, VECM estimation results indicate that when the cointegrating relationship is perturbed by the arrival of ntis, the KODEX200(ETF) does not adjusted to restore equilibrium. This is the task of the KOSPI200 futures and spot. These two index securities use the KODEX200 to represent the ntioequilibrium price, with the KOSPI200 futures responding faster than the KOSPI200 spot. When the cointegrating relationship betweeiesOSPI200 spot and futues is perturbed by the arrival of ntis, the KOSPI200 spot does adjusted to restore equilibrium. Next, the results from the multivariate GARCH modes indicate that the volatilities of esOSPI200 spot and futures markets suggest unidirectiona1volatility spillover from KOSPI200 futures to KOSPI200 spot. KODEX200(ETF) volatilities spill over bothesOSPI200 spot and futures markets. and this happen in the reverse direction with a strong effect from the KODEX200 to KOSP200 futures and spot. The overall findings indicate that the KODEX200(ETF) market dominates KOSPI200 futures and spot in the price discovery process. The regulation of Instutional traders on trading on futures markets explains its superior price discovery function.