What is so special about KOSPI 200 Index Futures Contract?
Analysis of Trading Volume and Liquidity

The Korean Stock Exchange’s (KSE) KOSPI 200 Index Futures and Options have been the fastest growing derivatives contracts in the world in recent years. This study identifies the factors contributing to the success, as measured by trading volume, of this market. The analyses of the minute-by-minute trading data indicate that trading volume, price volatility, and bid-ask spreads of the Korean futures contract display patterns different from more mature index futures contracts. Empirical results based on a GMM model of trading volume, bid-ask spreads and price volatility suggest that the volume of trade observed in the market is unlikely to be driven by hedging demand. Further evidence based on a more recent model of volume and return dynamics of hedging and speculation suggests that trading is motivated by speculation, especially by individual investors. The findings of this study suggest that speculative profit-oriented trading rather than risk hedging-oriented trading is likely to be behind the success of the Korean futures market’s trading volume, which offer important implications for the design and development of derivatives contracts for other emerging economies that may initiate the futures markets.