The Relationship between Volatility and Trading Volume in Korea’s Financial Markets
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The aim of this study is to identify the cross-market relationship between trade volume and volatility among Korea's financial markets, including the KOSPI 200 Index, KOSPI 200 options, and KOSPI 200 futures. With regards to the relationship between the trading volume of the KOSPI 200 Index and the volatility of KOSPI 200 derivatives markets, the trading volume of the underlying index is found to increase the volatilities of KOSPI 200 options and the futures markets. The expected trading volume of the underlying index has a positive relation with VKOSPI, which is the options market volatility measure; further, the unexpected components have a positive relation with the volatility of the futures market. In short, the trading volume of the underlying index is positively related with the volatilities of options and futures markets. Moreover, with regards to the relation between derivatives' trading activities and the underlying index volatility, open interests of call and futures, trading volume of futures, and its expected and unexpected components are positively related with the volatility of the KOSPI 200 Index. On the other hand, open interests of put options and their expected components have a negative relation with the volatility of the KOSPI 200 Index. Our empirical results imply that volume and volatility relations have some cross financial markets effects in both the underlying and derivatives markets; furthermore, the trading volumes and volatilities of the underlying and derivatives markets are deeply interrelated with each other.
Abstract
The aim of this study is to identify the cross-market relationship between trade volume and volatility among Korea's financial markets, including the KOSPI 200 Index, KOSPI 200 options, and KOSPI 200 futures. With regards to the relationship between the trading volume of the KOSPI 200 Index and the volatility of KOSPI 200 derivatives markets, the trading volume of the underlying index is found to increase the volatilities of KOSPI 200 options and the futures markets. The expected trading volume of the underlying index has a positive relation with VKOSPI, which is the options market volatility measure; further, the unexpected components have a positive relation with the volatility of the futures market. In short, the trading volume of the underlying index is positively related with the volatilities of options and futures markets. Moreover, with regards to the relation between derivatives' trading activities and the underlying index volatility, open interests of call and futures, trading volume of futures, and its expected and unexpected components are positively related with the volatility of the KOSPI 200 Index. On the other hand, open interests of put options and their expected components have a negative relation with the volatility of the KOSPI 200 Index. Our empirical results imply that volume and volatility relations have some cross financial markets effects in both the underlying and derivatives markets; furthermore, the trading volumes and volatilities of the underlying and derivatives markets are deeply interrelated with each other.
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