Asymmetric Mispricing and Regime-dependent Dynamics in Futures and Options Markets* Jaeram Lee and Doojin Ryu Received 9 May 2014; accepted 26 November 2015 We examine regime-dependent price dynamics and mispricing adjustments within the KOSPI200 spot, futures and options markets through an analysis of data from January 2000 to December 2014. Investors exploit mispricing between derivatives and spot markets only if mispricing is sufficiently large. The futures traders take long, rather than short, positions to adjust for mispricing. Mispricing between spot and options markets is adjusted by trading options and not by trading spots. We find the bidirectional information flows between spot and futures markets when the futures- implied index is sufficiently larger than the spot index. In contrast, no significant lead–lag relationship between spot and options markets exists. Significant asymmetric transaction costs exist in the spot market and this asymmetry has decreased over time. Keywords: KOSPI200 futures and options, limited dependent variable model, mispricing, threshold vector error-correction model, transaction costs. JEL classification codes: G13, G14, G32. doi: 10.1111/asej.12084 I. Introduction Mispricing in derivatives markets can be defined as the difference between the theoretical underlying asset price under no-arbitrage conditions, such as the cost-of-carry hypothesis (in the case of futures) or put-call parity (in the case of options), and its market price. Many studies examine the dynamics of mispricing in relation to market conditions from this perspective. For example, MacKinlay and Ramaswamy (1988) argue that the difference between the futures price and its theoretical price in the spot market is limited due to transaction costs; however, it increases with time-to-maturity. Ofek et al. (2004) find that the extent of the put- call parity violations in the US individual options market is significantly related to the cost of short-selling. Cremers and Weinbaum (2010) claim that mispricing, represented by the deviation from put-call parity, predicts underlying returns. In order to examine the mispricing issue within derivatives and commodities markets, certain innovative studies adopt a threshold vector error-correction model * Lee: College of Business, KAIST, 85 Hoegiro, Dongdaemun-gu, Seoul, Korea. Ryu (corresponding author): College of Economics, Sungkyunkwan University, 25-2, Sungkyunkwan-ro, Jongno-gu, Seoul 03063, Korea. Email: sharpjin@skku.edu. We are grateful for the helpful comments and suggestions from Jangkoo Kang, Baeho Kim, Bum Suk Kim, Heejin Yang and all the participants of the SKKU financial economics seminar. This work was supported by a National Research Foundation of Korea Grant funded by the Korean Government (NRF-2014S1A5B8060964). © 2016 East Asian Economic Association and John Wiley & Sons Australia, Ltd Asian Economic Journal 2016, Vol. 30 No. 1, 47–65 47