Information Content of Adjusted Implied Volatility in the KOSPI 200 Index Options Market

Abstract

This study examines the forecasting ability of the adjusted implied volatility (AIV), which is suggested by Kang, Kim and Yoon (2009), using the horserace competition with historical volatility, model-free implied volatility, and BS implied volatility in the KOSPI 200 index options market. The adjusted implied volatility is applicable when investors are not risk averse or when underlying returns do not follow a normal distribution. This implies that AIV is consistent with the presence of risk premia for other risk such as volatility risk and jump risk. Using KOSPI 200 index options, it is shown that the AIV outperforms other volatility estimates in terms of the unbiasedness for future realized volatilities as well as the forecasting errors.

Geometric and arithmetic realized comoments

“…2. Implied moments can be obtained from options (Bakshi and Madan, 2000;Bakshi et al, 2003;Kang et al, 2009;Neuberger, 2012).…”