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

Jun Sik Kim and Doojin Ryu

Emerging Markets Review, 2015, vol. 22, issue C, 43-64

Abstract: In terms of quantifying market risk, this study examines the information and indication embedded in implied volatilities extracted from the KOSPI 200 options and proposes a modified value-at-risk (VaR) framework utilizing the implied volatilities. Our empirical results indicate that the model-free implied volatility index of the KOSPI 200 (VKOSPI) does not greatly enhance the performance of suggested VaR models, compared with other volatility forecasting models, especially during and after the recent financial crisis. Furthermore, under the VaR framework, the VKOSPI does not perform better than Black–Scholes (BS) implied volatilities in measuring market risk. We also find that before the financial crisis, the BS implied volatility of out-of-the-money (OTM) options yields a better performance of the VaR models than the BS implied volatility of at-the-money (ATM) options. However, during and after the crisis, the VaR models incorporating the BS ATM implied volatility outperform the VaR models incorporating the BS OTM implied volatility. Our additional analyses show that combining with an extended GJR–GARCH model, which captures the asymmetric volatility effect, improves the overall performance of VaR models.

Keywords: Value-at-risk; Implied volatility; Market risk; VKOSPI; KOSPI 200 options (search for similar items in EconPapers)
JEL-codes: G15 G17 G19 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1566014114000752
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:22:y:2015:i:c:p:43-64

DOI: 10.1016/j.ememar.2014.11.001

Access Statistics for this article

Emerging Markets Review is currently edited by Jonathan A. Batten

More articles in Emerging Markets Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().