This study investigates whether stochastic volatility is priced on KOPSI 200 index
options by using the delta-hedged gains on a portfolio of a long position in a call, hedged
by a short position in the underlying asset, following Bakshi and Kapadia (2003). Contrary
to other financial markets such as the S&P index options market, volatility risk
is not systematically and consistently compensated on the KOSPI options. Rather
jump fear influences most in determining KOSPI 200 option prices. Our results are
consistent with extant literatures which have shown that Korean derivatives market is
dominated by directional traders, and so there might be no hedging demands on option
trades. In our research, we do not impose any specification on the stochastic processes
of the underlying asset, volatility, and jumps, consequently setting our results free from
misspecification errors.
Keywords: KOSPI 200 index; KOSPI 200 index option; volatility risk premium; stochastic
volatility/jump diffusion; risk-neutral skewness; risk-neutral kurtosis