Option pricing models revisited: evidence from the KOSPI 200 options market

This study investigates the optimal option pricing model for the KOSPI 200 options market, where market conditions and investor composition have evolved markedly. We compare the pricing and hedging performances of the Black–Scholes (1973) model (BS), ad hoc Black–Scholes (AHBS) models, the stochastic volatility model (SV), and the stochastic volatility with jumps model (SVJ). The analysis covers in-sample pricing, out-of-sample pricing, and hedging tests. Empirical results show that the SVJ model, which incorporates stochastic volatility and jumps, consistently outperforms others in both in-sample and out-of-sample pricing across different horizons. In contrast, the AHBS A2 model, which includes strike price and its squared term, delivers superior hedging performance. Robustness checks confirm that these results hold across subperiods, including volatile episodes such as the COVID-19 crash, and that model differences are statistically significant. Overall, the findings indicate that the dominance of sophisticated models like SVJ has strengthened in recent years, as foreign investors have become dominant and market liquidity has changed. This contrasts with earlier periods when simpler BS-based models performed relatively better in retail-driven markets. The results also correspond with those observed in the KOSPI weekly and mini options, implying that arbitrage linkages enhance pricing efficiency. The contrast between the SVJ and AHBS (A2) models reflects a structural shift toward institutional dominance, where advanced models improve valuation accuracy while simpler frameworks remain more effective for practical hedging.