The impact of stock index futures on the Korean stock market

Abstract

This article investigates the impact on the spot market of trading in KOSPI 200 futures. Empirical results show that futures trading increases the speed at which information is impounded into spot market prices, reduces the persistence of information and increases spot market volatility. The spot and futures prices are cointegrated and there is bidirectional causality between the two markets. The lead-lag relation is asymmetric with weaker evidence that the spot index leads futures and stronger evidence that the stock index futures market leads the spot market.