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Are the KOSPI 200 implied volatilities useful in value-at-risk models?

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  • Kim, Jun Sik
  • Ryu, Doojin

Abstract

In terms of quantifying market risk, this study examines the information and indication embedded in implied volatilities extracted from the KOSPI 200 options and proposes a modified value-at-risk (VaR) framework utilizing the implied volatilities. Our empirical results indicate that the model-free implied volatility index of the KOSPI 200 (VKOSPI) does not greatly enhance the performance of suggested VaR models, compared with other volatility forecasting models, especially during and after the recent financial crisis. Furthermore, under the VaR framework, the VKOSPI does not perform better than Black–Scholes (BS) implied volatilities in measuring market risk. We also find that before the financial crisis, the BS implied volatility of out-of-the-money (OTM) options yields a better performance of the VaR models than the BS implied volatility of at-the-money (ATM) options. However, during and after the crisis, the VaR models incorporating the BS ATM implied volatility outperform the VaR models incorporating the BS OTM implied volatility. Our additional analyses show that combining with an extended GJR–GARCH model, which captures the asymmetric volatility effect, improves the overall performance of VaR models.

Suggested Citation

  • Kim, Jun Sik & Ryu, Doojin, 2015. "Are the KOSPI 200 implied volatilities useful in value-at-risk models?," Emerging Markets Review, Elsevier, vol. 22(C), pages 43-64.
  • Handle: RePEc:eee:ememar:v:22:y:2015:i:c:p:43-64
    DOI: 10.1016/j.ememar.2014.11.001
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    Cited by:

    1. Webb, Robert I. & Ryu, Doojin & Ryu, Doowon & Han, Joongho, 2016. "The price impact of futures trades and their intraday seasonality," Emerging Markets Review, Elsevier, vol. 26(C), pages 80-98.
    2. Han, Heejoon & Kutan, Ali M. & Ryu, Doojin, 2015. "Effects of the US stock market return and volatility on the VKOSPI," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 9, pages 1-34.
    3. Han, Heejoon & Kutan, Ali M. & Ryu, Doojin, 2015. "Modeling and predicting the market volatility index: The case of VKOSPI," Economics Discussion Papers 2015-7, Kiel Institute for the World Economy (IfW).
    4. Kim, Joseph H.T. & Li, Johnny S.H., 2017. "Risk-neutral valuation of the non-recourse protection in reverse mortgages: A case study for Korea," Emerging Markets Review, Elsevier, vol. 30(C), pages 133-154.
    5. repec:rjr:romjef:v::y:2017:i:2:p:45-61 is not listed on IDEAS
    6. repec:eee:ememar:v:32:y:2017:i:c:p:38-51 is not listed on IDEAS
    7. Lee, Jaeram & Kang, Jangkoo & Ryu, Doojin, 2015. "Common deviation and regime-dependent dynamics in the index derivatives markets," Pacific-Basin Finance Journal, Elsevier, vol. 33(C), pages 1-22.
    8. repec:eee:phsmap:v:482:y:2017:i:c:p:638-648 is not listed on IDEAS
    9. Song, Wonho & Ryu, Doojin & Webb, Robert I., 2016. "Overseas market shocks and VKOSPI dynamics: A Markov-switching approach," Finance Research Letters, Elsevier, vol. 16(C), pages 275-282.
    10. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.

    More about this item

    Keywords

    Value-at-risk; Implied volatility; Market risk; VKOSPI; KOSPI 200 options;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G19 - Financial Economics - - General Financial Markets - - - Other

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