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Predictability of OTC Option Volatility for Future Stock Volatility

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  • Jungmu Kim

    (Department of Business Administration, Yeungnam University, Gyeongsan 38541, Korea)

  • Yuen Jung Park

    (Department of Finance, College of Business, Hallym University, Chuncheon 24252, Korea)

Abstract

This study explores the information content of the implied volatility inferred from stock index options in the over-the-counter (OTC) market, which has rarely been studied in the literature. Using OTC calls, puts, and straddles on the KOSPI 200 index, we find that implied volatility generally outperforms historical volatility in predicting future realized volatility, although it is not an unbiased estimator. The results are more apparent for options with shorter maturity. However, while implied volatility has strong predictability during normal periods, historical volatility is superior to implied volatility during a period of crisis due to the liquidity contraction of the OTC options market. This finding suggests that the OTC options market can play a role in conveying important information to predict future volatility.

Suggested Citation

  • Jungmu Kim & Yuen Jung Park, 2020. "Predictability of OTC Option Volatility for Future Stock Volatility," Sustainability, MDPI, vol. 12(12), pages 1-23, June.
    • Handle: RePEc:gam:jsusta:v:12:y:2020:i:12:p:5200-:d:376450
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    References listed on IDEAS

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