Analysis on the Effect of Price Discovery in Mini Derivatives : The Case of KOSPI200 Mini Options

The KOSPI200 mini options market, introduced in July 2015, is a market where the trading multiplier is reduced to one-fifth of the regular options. This study shows that the price discovery effect of the original options and the mini options estimated by the vector error correction model (VECM) and Hasbrouck's information share (1995, 2003), based on the regular options-mini options arbitrage and the options-spot arbitrage. The results of the empirical analysis are summarized as follows. First, in the price discovery between the regular options and the mini options, regular options dominate mini options at a statistically significant level. Second, mini options tend to lead the spot, which is stronger than the regular options. Therefore, the regular options and the mini options show asymmetrical behavior in the price discovery process of the spot, opposite to each other and are interpreted as alternative derivatives in terms of investment strategy. Considering the immaturity of mini options market established during the sample period, the price discovery is efficient even though the trading activity in the mini options is lower than that of the regular options.