Title

Fear in the Korea Market

Publication Type

Journal Article

Publication Date

2007

Abstract

To quantify the level of fear in the Korea equity market, we construct a volatility index with the market prices of options on the KOSPI 200 index. We use the model-free approach in our construction. The resulting volatility index, referred to as KIX, is found to play a role similar to VIX, the volatility index for the U.S. market. We find that KIX captures the level of fear for the Korea market in the sense that a decline in the KOSPI 200 index is typically associated with an asymmetrically larger increase in KIX. This negative correlation is statistically significant and robust when other proxies for market condition such as the put-call ratio and the advance-decline ratio are used as control variables. We apply KIX to design a profitable trading strategy and to quantify the premium for variance risk. Our analysis suggests that the trading gain and the variance risk premium are statistically and economically significant. These two applications shed light on a common theme of financial economics: Investors who bear the increased risk forecasted demand a larger risk premium from those who want to avoid the risk.

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Review of Futures Markets

Volume

16

Issue

1

First Page

106

Last Page

140

ISSN

0898-011X

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