The impact of the capital gains tax on the Korean derivatives market

Abstract

After lively debates on whether there was too much trading in the Korean derivatives market, the Korean government decided in 2016 to introduce a capital gains tax on KOSPI 200 futures and options. The stated goals were to secure tax revenue and restrict speculative trading. This article aims to assess the impact of this tax on the liquidity of the Korean derivatives market. We take advantage of an ad hoc delay between the taxation of KOSPI and Mini-KOSPI derivatives to apply a difference-indifferences analysis. The introduction of the capital gains tax reduced market activity for KOSPI 200 derivatives, but its extension to Mini-KOSPI 200 derivatives had no significant impact. Moreover, we do not find any significant effect on the bid–ask spread. A closer look at different types of traders also shows a decrease in the trading activity of individuals, compared to other traders who are exempt.