The Expiration Effect on the Relationship between the KOSPI 200 Stock Index and its Nearby Futures Markets

Abstract

This article investigates the abnormal price movement that has an expiration effect on the relationship between the KOSPI 200 stock index and its nearby futures markets in Korean financial markets. Unlike early studies that examined the abnormal price movement around the expiration day of derivatives contracts just separately in each market, the purpose of our study is to verify whether an expiration effect exists on the relationship between the underlying asset and its derivatives markets in Korean financial markets, using the concordance correlation coefficient, which allows us to analyze the agreement between two financial markets. From June 14, 1996 to December 14, 2006, the concordance correlation coefficient increases as the date for expiration of futures contracts comes closer; however, the Pearson correlation coefficient does not explain the expiration effect of futures contracts. This result implies that the expiration effect of futures cannot be captured by the Pearson correlation coefficient, but can be captured by the concordance correlation coefficient between the KOSPI 200 stock index and its futures markets. Our results show that it is desirable to use the concordance correlation coefficient to analyze the expiration effect on the relationship, rather than the Pearson correlation coefficient.