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This paper conducts an empirical analysis to examine the tax effect on the basis (the difference between the futures price and the cash price) of KOSPI200 stock-index futures.

The standard cost-of-carry model relies on a simple non-arbitrage argument in which a trader replicates a “synthetic bond” with short in the futures and long in the underlying basket of cash stocks. While the synthetic bond provides the same or similar economic profiles as a normal interest-bearing instrument, the tax treatment for each is different under Korean tax code. The implicit taxes are expected to lower the before-tax rate of return on the synthetic bond, and thus to shrink the size of the basis.

The analysis indicates that implicit taxes are reflected and thus priced in the basis of KOSPI200 stock-index futures.