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A Joint Analysis of the KOSPI 200 Option and ODAX Option Markets Dynamics

Listed author(s):
  • Ji Cao
  • Wolfgang Härdle
  • Julius Mungo

As a function of strike and time to maturity the implied volatility estimation is a challenging task in nancial econometrics. Dynamic Semiparametric Factor Models (DSFM) are a model class that allows for the estimation of the implied volatility surface (IVS) in a dynamic context, employing semiparametric factor functions and time-varying loadings. Because nancial asset volatilities move over time, across assets and over markets, this paper analyses volatility interaction between German and Korean stock markets. As proxy for the volatility, factor loadings series derived from a DSFM application on option prices are employed. We examine volatility transmission between the markets under the vector autoregressive (VAR) model framework. Our results show that a shock in the volatility of one market may not translate directly into greater uncertainty in another market and it is unlikely that portfolio investors can bene t from diversi cation among these markets due to cointegration.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2009-019.

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Length: 23 pages
Date of creation: Mar 2009
Handle: RePEc:hum:wpaper:sfb649dp2009-019
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