A Joint Analysis of the KOSPI 200 Option and ODAX Option Markets Dynamics

Ji Cao, Wolfgang Karl Härdle and Julius Mungo

No SFB649DP2009-019, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: As a function of strike and time to maturity the implied volatility estimation is a challenging task in nancial econometrics. Dynamic Semiparametric Factor Models (DSFM) are a model class that allows for the estimation of the implied volatility surface (IVS) in a dynamic context, employing semiparametric factor functions and time-varying loadings. Because nancial asset volatilities move over time, across assets and over markets, this paper analyses volatility interaction between German and Korean stock markets. As proxy for the volatility, factor loadings series derived from a DSFM application on option prices are employed. We examine volatility transmission between the markets under the vector autoregressive (VAR) model framework. Our results show that a shock in the volatility of one market may not translate directly into greater uncertainty in another market and it is unlikely that portfolio investors can bene t from diversi cation among these markets due to cointegration.

Keywords: implied volatility surface; dynamic semiparametric factor model; VAR; cointegration (search for similar items in EconPapers)
JEL-codes: C14 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm
Date: Written

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