Stock Returns and Implied Volatility: A New VAR Approach

Abstract

The authors re-examine the return-volatility relationship and its dynamics under a new vector autoregression (VAR) identification framework. By analyzing two model-free impliedvolatility indices -the well-established VIX (in the United States) and the recently published VKOSPI (in Korea) -and their stock market indices, the authors find an asymmetric volatility phenomenon in both the developed and emerging markets. However, the VKOSPI shows impulse response dynamics that are quite different from those of the VIX. This finding can be attributed to the unique characteristics of the KOSPI200 options market, which determine the dynamics of the VKOSPI. JEL G10 G15

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

“…Our finding on the relationship between the VKOSPI and the lagged S&P 500 return is consistent with an asymmetric volatility response, which indicates that the stock market return negatively affects the volatility level (Bekaert and Wu, 2000;Wu, 2001;Han, Guo, Ryu and Webb, 2012;Lee and Ryu, 2013). Based on the adjusted R 2 values and the significance of the estimated coefficients, we can conclude that the HAR-X model incorporating both the US stock market return and the implied volatility exhibits the best in-sample fitting performance and has the most explanatory power of all other macroeconomic variables in describing the VKOSPI dynamics (see M6).…”

“…Ryu (2012) introduces a method to construct the VKOSPI and measures its forecasting performance using a basic regression framework. Han, Guo et al (2012) and Lee and Ryu (2013) investigate the asymmetric volatility phenomenon using the VKOSPI dataset. Lee and Ryu (2014a) and Kim and Ryu (2015b) examine the applicability of the VKOSPI toward constructing investment strategies and in the value-at-risk framework, respectively.…”

Linkage between India Implied Volatility Index and Stock Index Returns

“…Siriopoulos and Fassas [15] established a significant negative and asymmetric linkage in the Greek stock market, which is contradictory to the earlier finding of Skiadopoulos [16]. Lee and Ryu [17] confirmed the existence of asymmetric volatility phenomenon in the Korean and the US stock markets. Similarly, Shaikh and Padhi [18] found the negative and asymmetric effect in the Indian stock market.…”

Are the KOSPI 200 implied volatilities useful in value-at-risk models?

“…The orders submitted by 3 Ahn, Kang, and Ryu (2008Ryu ( , 2010, Baik, Kang, and Kim (2013), Guo, Han, and Ryu (2013), Kim and Lee (2013), and Ryu (2011) clearly describe the importance, status, and market microstructure characteristics of the KOSPI 200 options market.…”