Professor Doojin Ryu’s research team from the Department of Economics at SKKU has published an international collaborative research paper through the SKKU Global Research Platform, collaborating with Singapore Management University, CUNEF Universidad, and Willamette University. The study utilizes high-frequency microstructure data, collected in millisecond intervals from the derivatives market, to propose a new metric for evaluating investor sophistication and the complexity of their strategies. It also provides a novel perspective on the underlying motives driving derivatives trading.

The analysis of various futures and options trading strategies across different market participants revealed that, while many retail investors engage in relatively simple option-based trades, institutional investors tend to implement more sophisticated volatility trading strategies that capitalize on the traditional characteristics of options. More complex strategies, such as option spreads, are employed by around 5% of institutional investors and about 1% of retail investors, indicating that relatively only a handful of market participants utilize these advanced strategies. The study comprehensively examines how investors employing sophisticated strategies achieve notable returns in the derivatives market. It also underscores that performance differences are pronounced even within the retail investor group—often considered noise traders—depending on the complexity and sophistication of their strategies.

Furthermore, the study finds that the effectiveness and performance of investment styles that strategically leverage futures and options with varying strike prices and types exhibit persistence over time. This persistence cannot be fully explained by risk premium, providing new empirical evidence. The study also highlights the critical role that investor sophistication plays in shaping the pricing and liquidity dynamics of derivatives markets.

This collaborative research paper, co-authored with international scholars who visited SKKU through the SKKU Global Finance Research Center, was published in July 2024 in Management Science, a leading journal in the field of management.

Hu, J., Kirilova, A., Park, S.G., Ryu, D.* (2024), Who profits from trading options? Management Science, 70(7), 4167-4952. (DOI: 10.1287/mnsc.2023.4916)

*Alphabetical order