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Effects of the US stock market return and volatility on the VKOSPI

Listed author(s):
  • Han, Heejoon
  • Kutan, Ali M.
  • Ryu, Doojin

The KOSPI (Korea Composite Stock Price Index) 200 options are one of the most actively traded derivatives in the world. This paper empirically examines (a) the statistical properties of the Korea's representative implied volatility index (VKOSPI) derived from the KOSPI 200 options and (b) the macroeconomic and financial variables that can predict the implied volatility process of the index, using augmented heterogeneous autoregressive (HAR) models with exogenous covariates. The results suggest that the elaborate HAR framework is proficient at describing the dynamics of the VKOSPI and that some domestic macroeconomic variables explain the VKOSPI. More importantly, we find that the stock market return and implied volatility index of the US market (i.e., the S&P 500 spot return and the VIX from the S&P 500 options) play a key role in predicting the level of the VKOSPI and explaining its dynamics, and their explanatory power dominates that of domestic macro-finance variables. Further, while the domestic stock market return does not predict the VKOSPI, the US stock market return does so rather well. When two global factors, both the US stock market return and the US implied volatility index, are incorporated into the HAR framework, the model exhibits the best performance in terms of both in-sample fitting and out-of-sample forecasting ability.

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2015-35
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File URL: https://www.econstor.eu/bitstream/10419/121929/1/838426336.pdf
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Article provided by Kiel Institute for the World Economy (IfW) in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 9 (2015)
Issue (Month): ()
Pages: 1-34

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Handle: RePEc:zbw:ifweej:201535
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  1. Mark Britten-Jones & Anthony Neuberger, 2000. "Option Prices, Implied Price Processes, and Stochastic Volatility," Journal of Finance, American Finance Association, vol. 55(2), pages 839-866, 04.
  2. Fernandes, Marcelo & Medeiros, Marcelo C. & Scharth, Marcel, 2014. "Modeling and predicting the CBOE market volatility index," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 1-10.
  3. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, vol. 64(5), pages 1067-1084, September.
  4. Hee‐Joon Ahn & Jangkoo Kang & Doojin Ryu, 2008. "Informed trading in the index option market: The case of KOSPI 200 options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(12), pages 1118-1146, December.
  5. Lee, Bong Soo & Ryu, Doojin, 2013. "Stock returns and implied volatility: A new VAR approach," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 7, pages 1-20.
  6. Doojin Ryu, 2015. "The Information Content of Trades: An Analysis of KOSPI 200 Index Derivatives," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(3), pages 201-221, 03.
  7. Bekaert, Geert & Wu, Guojun, 2000. "Asymmetric Volatility and Risk in Equity Markets," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 1-42.
  8. repec:wyi:journl:002157 is not listed on IDEAS
  9. Becker, Ralf & Clements, Adam E. & White, Scott I., 2007. "Does implied volatility provide any information beyond that captured in model-based volatility forecasts?," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2535-2549, August.
  10. Dungey, Mardi & Gajurel, Dinesh, 2014. "Equity market contagion during the global financial crisis: Evidence from the world's eight largest economies," Economic Systems, Elsevier, vol. 38(2), pages 161-177.
  11. Charles J. Corrado & Thomas W. Miller, Jr., 2005. "The forecast quality of CBOE implied volatility indexes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(4), pages 339-373, 04.
  12. Biao Guo & Qian Han & Doojin Ryu, 2013. "Is the KOSPI 200 Options Market Efficient? Parametric and Nonparametric Tests of the Martingale Restriction," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 33(7), pages 629-652, 07.
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