Asymmetric and negative return-volatility relationship: The case of the VKOSPI

ABSTRACT KOSPI 200 index options are the most actively traded exchange-listed derivative contracts in the world. And, unlike most other active options markets, trading is dominated by individual investors. This study examines the short-term relationship between stock market returns and implied volatility in the Korean financial market using high frequency data on the recently introduced volatility index (VKOSPI) implied by KOSPI 200 options. We find a strong asymmetric and negative return-volatility relationship at both the daily and intraday levels, which cannot be explained by either leverage or volatility feedback hypotheses on the asymmetric volatility phenomenon. Moreover, we also find that the asymmetric relationship is more pronounced for extremely negative stock market returns. We conjecture that behavioral factors better explain the observed asymmetric return-volatility relationship.

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