Jimmy Lockwood and Larry Lockwood*
The Korean Stock Exchange (KRX) is among the most rapidly growing markets in the world, and the Korean KOSPI 200 stock index option is among the most traded options contract. Not surprisingly, the KRX and related derivatives products have been attracting significant interest from investors and researchers alike. The KRX offers an excellent opportunity to examine the effects of individual investors. Most of the trading on the KRX is done by individuals as opposed to institutions. This paper examines behavioral tendencies of traders of the KOSPI 200 option contract. Findings show the KOPSI 200 index options contract is often mispriced and that the mispricing occurs most often after extreme downturns in the KRX. Traders exhibit cognitive recency biases, strong preferences for skewness, and often overreact to changes in the KRX spot market.
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