Derivatives trading, volatility spillover, and regulation: Evidence from the Korean securities markets

Sung C. Bae, Taek Ho Kwon, Jong Won Park

Research output: Contribution to journalArticlepeer-review

7 Scopus citations


Unlike the U.S. and Japanese securities markets, we find new evidence of volatility spillover between index stocks and non-index stocks following the introductions of index derivatives trading in the Korean securities markets. We further find that the degree of volatility spillover is closely related to the level of market deregulation; significant return volatility spills over from non-index to index stocks during deregulation period but in the opposite direction during post-deregulation period. Our empirical results show that the former volatility spillover from non-index to index stocks can be explained by the transitory contagion effect associated with the 1997 Korean financial crisis and the subsequent market deregulation, whereas the latter volatility spillover from index to non-index stocks is attributed to the permanent information spillover effect. This latter evidence suggests that the information regarding investors' expectations on the future common market factors is first reflected into the return volatility of index stocks and then transferred to the trading of non-index stocks against which derivatives are not traded. Our results are robust to different estimation and sample construction methods.

Original languageEnglish
Pages (from-to)563-597
Number of pages35
JournalJournal of Futures Markets
Issue number6
StatePublished - Jun 2009


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