Information Flows of the Skewness between the Stock and Option Markets
Sol Kim
Hye-Hyun Park
Ki-Jung Eom
This paper investigates the effects of risk neutral distribution (RND) from option prices on the distribution of the underlying asset. More specifically, we focus on the third moment of distribution, called the skewness, which contains important information predicting the jumps of stock index. The sample period covers from January 2002 to July 2006 with the closing price returns of KOSPI 200 Index and the KOSPI 200 options. The skewnessness of the risk neutral distribution is estimated from non-parametric method of Bakshi, Kapadia, and Madan(2003) and the parametric method of Corrado and Su(1996). When estimating the skewness of the underlying assets, we employ Chen, Hong and Stein(2001) model and calculate the historical skewnessness from the 1-month return of the underlying asset. Using statistical methodology such as VAR(vector autoregressive model), Granger causality test, impulse response and variance decomposition model, we examine whether the skewness of the underlying asset responds to the change of the implied RND. Followings are the major findings and implications drawn from the empirical analysis of the Korean options market. First of all, the skewness of options estimated from non-parametric method have information contents predicting the third-moment of KOSPI 200 index return whereas the skewness of options estimated from parametric method does not have any information forecasting the skewness of KOSPI 200 index return.