The Effects of the Regulations on the ELW Markets : An Analysis on ELW Pricing

Sangki Lee, Chung-hun Hong

Journal of Derivatives and Quantitative Studies: 선물연구

ISSN: 1229-988X

Open Access. Article publication date: 31 May 2016

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Abstract

We examine the effects of new regulations introduced by Korean government to cool down overheated Korean ELW markets. We also investigate whether ELWs are fairly priced as noted in the previous research. The empirical findings are as follows. Firstly, ELW was more expensive than KOSPI200 option not only before but also after the introduction of the new regulations. But degrees of the overpricedness are decreased significantly with the new regulations. Secondly, we confirm the well known facts in the literature that liquidity providers get extra profits as monopolistic providers for ELWs. Thirdly, we analyze the determinants of the differences in premiums between ELW and KOSPI200 option. The trading volume is negatively correlated with premium difference, however, timeto-maturity and market share are not statistically significant. Even though it seems that the financial regulator achieve their primary purpose to control the overheated market, we find that the new regulations have almost no effects on the overpricing problem, which implies that overpricing in ELW is not related to the market inefficiency.

Keywords

Citation

Lee, S. and Hong, C.-h. (2016), "The Effects of the Regulations on the ELW Markets : An Analysis on ELW Pricing", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 24 No. 2, pp. 301-338. https://doi.org/10.1108/JDQS-02-2016-B0005

Publisher

:

Emerald Publishing Limited

Copyright © 2016 Emerald Publishing Limited

License

This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode


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