Information Contents in the Volatility Spread of Index Options

This article examines the information contents in the implied volatility spread between the KOSPI200 at-the-money puts and calls with the same strike price and maturity. Using 1-minute KOSPI200 index and options data, our study shows that the volatility spread leads KOSPI200 index return for about 30 minutes during the entire sample period. Moreover, our study reveals that the volatility spread is an independent information source even after using the implied skewness parameter as an additional controlled variable, and that the volatility spread leads the index much more than the skewness paremeter does. We also conduct impulse response tests and variance decomposition based on the VAR model, and the results also show that the volatility spread has the most significant influence on the other variables. Finally, we conduct regression analysis to find whether the extremely bullish or bearish markets affect the informationality of volatility spread, and the results show that the information contents decrease when the market is in an extreme condition.