The Maturity Structure of Volatility and Trading Activity in the KOSPI200 Futures Market

This study examines the effects of trading activities on the maturity structure of the volatility in the KOSPI200 futures market. It involves estimation of a variant of the E-GARCH(1,1) model of futures returns. The empirical results suggest that the KOSPI200 futures market tends to be volatile right before and right after the nearest contract expires. High volatility immediately prior to maturity can be explained within the framework of the well-known Samuelson hypothesis. However, it is not easy to explain why volatility increases right after the nearest contract expires. To do so, we estimate the volatility equation by using expected and unexpected trading volume relative to open interest as explanatory variables. The results show that the observed U-shaped maturity volatility structure reflects the trading activity right before and right after the expiry, and, to be noteworthy, in particular, is that volatility increases immediately after the nearest contract reaches maturity, due to the high unexpected trading volume relative to open interest. The trading activity in the KOSPI200 futures market is typically heavily concentrated on the nearest contract, which is indicative of low levels of market depth in the next-to-nearest contract. This, in turn, suggests that there has been a temporary market thinness right before and after the replacement of the nearest contract. The KOSPI200 futures returns display a U-shaped maturity structure of volatility, due mainly to the temporary market thinness at the time of the expiry.