Implied Volatility Index of KOSPI200: Information Contents and Properties

Abstract

This paper investigates the properties and information contents of an implied volatility index based on Korea's index options contract, which is the most liquid options product in the world. Analyzing the recent 100-month-long volatility index series (VKOSPI; Volatility Index of KOSPI200) constructed using the KOSPI200 index and options prices, we measure the in-sample and out-of-sample forecasting performances of the implied volatility index and examine its quality as a market volatility indicator. The VKOSPI exhibits an asymmetric volatility response to positive and negative return shocks and has a significantly positive effect on the explanatory power of nested GARCH models. Though the VKOSPI provides slightly biased forecasts, as other risk-adjusted volatility measures also do, it outperforms the Black-Scholes implied volatility, the RiskMetrics approach, and the GJR-GARCH model (which generally shows the best in-sample performance among the GARCH-family models) in forecasting future realized volatilities.

Keywords:

• Black-Scholes
• GARCH
• implied volatility
• KOSPI200 Options
• RiskMetrics
• VKOSPI