Volatility prediction during prolonged crises: Evidence from Korean index options
Bhabra, Gurmeet S; Gonzalez, Maria Liliana; Kim, Myeong Sup; Powell, John G
This paper examines KOSPI200 index option prices in order to investigate whether index option implied volatilities foreshadowed the 1997 economic crisis in Korea. Results indicate the absence of strong fears of an impending market downturn prior to the crisis. Put option implied volatilities rose sharply as the crisis intensified, however, and the difference between put and call implied volatilities reached extreme levels compared to results found in previous studies of financial crises in developed markets. The study indicates that option traders reacted to the crisis rather than predicting its onset, perhaps reflecting the youthfulness of the market. Traders also appear to have learned from the crisis as it intensified.
Conference: 2001 University of Otago Seminar 16 March 2001, Room 2.07, University of Otago, Dunedin, New Zealand
Keywords: Financial crises; Volatility; Index options; Implied volatility; Developing markets; Volatility; Index options; Implied volatility; Developing markets