The fundamental question addressed in this study is whether the volatility implied by KOSPI 200 index option prices predicts ex-post realized volatility. Yang & Moon(1999)'s work indicates that the past volatility explains the future realized volatility better than the implied volatility. Such results have been construed as a vote against the hypothesis that the option market aggregates volatility information more efficiently and the Black-Scholes option pricing formula is valid for KOSPI 200 index options.
This study introduces a different research design to examine the relation between implied volatility and realized volatility. We examined several volatility forecasting instruments such as historical volatility, implied volatility and forecasted volatility. Our analysis employs a lower(monthly) sampling frequency and nonoverlapping data, such that exactly one implied and realized volatility estimates pertain to each time period under consideration. We find that implied volatility does predict future realized volatility in isolation as well as in conjunction with the history of past realized volatility. In fact, KOSPI 200 index option implied volatility subsumes the information content of past volatility in some of our specification. We attribute the difference to our use of a longer time period relative to previous works and our use of nonoverlapping data.
Our results provide an empirical justification for the common practice of interpreting the Black-Scholes implied volatility of KOSPI 200 index options as a volatility forecast.
