Lead-Lag Relationship between Volatility Index and Stock Market Index

Abstract

This study examines the lead-lag relationship between KOSPI200 and the volatility index based on the implied volatility from the KOSPI200 options. The sample period covers from January 2, 2003 to June 30, 2004. Both daily and minute-by-minute data were used for the lead-lag analysis. The study also determines whether the response of volatil ity index to KOSPI200 is symmetric or not. The most important findings may be summarized as follows. First, there is no lead-lag relationship between the change in volatility index and the KOSPI200 returns on a daily basis. However, on a minute-by-minute basis, volatility index leads KOSPI200 for the group of largest increases in volatility index, and the opposite is true for the group of largest decreases and least changes in volatility index. The option market appears to react more quickly to volatility increases, while the stock market seems more sensitive to volatility decreases. Second, the volatility increase in response to the stock market decline is more severe than the volatility decrease in response to the stock market rise for daily data. This evidence of asymmetry suggests that volatility index plays a role of investors’fear gauge. Our results show no asymmetric response of volatility index to stock market movements for weekly data.