Intraday Price Change and Trading Volume in the KTB Futures and Futures Option Markets

Abstract

This study examines the impacts of the KTB futures options, newly introduced at the Korea Futures Exchange (KOFEX) on May, 2002, on the intraday volatility and liquidity of the KTB futures markets for the period from January 17, 2002, to August 30, 2002. The results show that the volatility of the KTB futures appears to have increased since the inception of the KTB futures options. However, the increase in volatility largely disappears after controlling for the effects of volume, time-to-maturity, day-of-the-week, and bid-ask bounce. There is some mixed evidence regarding the impact on the liquidity of the KTB futures markets, in the sense that the trading volume has increased significantly whereas the bid-ask spreads have widened too. The KTB futures price changes are more likely to lead the price changes of the KTB futures options by about 15 minutes, which is probably due to the infrequent trading problem on the part of the KTB futures options. Finally, though infrequently traded, the put-futures parity condition is rarely violated, and thus is difficult to be exploited for arbitrage transactions, indicating that the two markets are closely linked each other.