Effects of the US Stock Market Return and Volatility on the VKOSPI

Abstract

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. JEL C22 C50 G14 G15

The directional information content of options volumes

“…For more discussion of the ample liquidity and characteristics of the KOSPI 200 options market, refer to the studies of Han, Guo, Ryu, and Webb (), Han, Kutan, and Ryu (), Kim, Park, and Ryu (), Ryu and Yang (), Song, Ryu, and Webb (), and Song, Ryu, and Webb ().…”

Option Market Characteristics and Price Monotonicity Violations

“…19 In addition to the VKOSPI, underlying asset return is another common factor that can affect option price dynamics. Trades by domestic individual investors, who are easily affected by 19 Korea's representative implied volatility index is documented in prior studies analyzing the daily dataset of the VKOSPI (Han, Kutan, & Ryu, 2015;Lee & Ryu, 2014;Song, Ryu, & Webb, 2016). Figure 3 shows the time trend of the KOSPI 200 and the VKOSPI during the sample period of this study.…”

The impacts of public news announcements on intraday implied volatility dynamics

“…Specifically, our objectives are to comprehensively examine the effect of macroeconomic news announcements on the dynamics of various implied volatilities, which reflect option market participants’ aggregate opinions and prudence, and to identify the factors that change these implied volatilities in response to such announcements. Because implied volatility dynamics describe and capture investors’ expectations (i.e., assessments of future volatility), fears, and sentiment changes better than historical volatilities do, we focus on implied volatility indices as our primary variable of interest; moreover, these indices forecast future market states better than historical volatilities do (Han, Guo, Ryu, & Webb, ; Han, Kutan, & Ryu, ; Song, Park, & Ryu, ; Song, Ryu, & Webb, , ) . We employ the implied volatilities of calls and puts as proxies for greed and fear, respectively (Park, Kutan, & Ryu, ; Uhl, ), to examine whether the asymmetry in the implied volatility response to macroeconomic news announcements arises because of investors’ different reactions to potential increases or decreases in prices.…”