In this paper, we examine the validity of an option pricing model and the forecasting power of implied volatility derived from KOSPI 200 stock index options.
In order to study these issues, this thesis employes an option pricing model developed by Kim(1992).
First, we investigate the relation between historical volatility and implied volatility computed from KOSPI 200 stock index options. We find that Kim's model improves upon the Black-Scholes option pricing model. Kim's model, however, also appears to be biased model.
Second, we analyze the performance of KOSPI 200 implied volatility as a forecast of future stock market volatility. The results indicate that the implied volatility is a biased forecast, but also that it contains relevant information regarding future volatility. The implied volatility of put options dominates the historical volatility in terms of ex ante forecasting power. On the other hand, the implied volatility of call options is outperformed by the historical volatility
