Abstract
This study examines whether program trading has an impact on the Korean stock market. We evaluate the dynamic interrelations between net program trading, net arbitrage trading, daily KOSPI return, volatility of KOSPI prices and daily KOSPI200 futures return. The relations are tested by performing Vector Autoregressive Models, Granger Causality Test, Impulse Response Function, and Forecast Error Variance Decomposition. We find that changes in the spot market return (or the futures return) lead to changes in net program trading and net arbitrage trading. However, changes in net program trading (or net arbitrage trading) do not cause changes in spot return (or futures return). Our results do not support the widely-held claim that program trading tends to increase the stock market volatility.
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