Are the KOSPI 200 implied volatilities useful in value-at-risk models?

In terms of quantifying market risk, this study examines the information and indication embedded in implied volatilities extracted from the KOSPI 200 options and proposes a modified value-at-risk (VaR) framework utilizing the implied volatilities. Our empirical results indicate that the model-free implied volatility index of the KOSPI 200 (VKOSPI) does not greatly enhance the performance of suggested VaR models, compared with other volatility forecasting models, especially during and after the recent financial crisis. Furthermore, under the VaR framework, the VKOSPI does not perform better than Black-Scholes (BS) implied volatilities in measuring market risk. We also find that before the financial crisis, the BS implied volatility of out-of-the-money (OTM) options yields a better performance of the VaR models than the BS implied volatility of at-the-money (ATM) options. However, during and after the crisis, the VaR models incorporating the BS ATM implied volatility outperform the VaR models incorporating the BS OTM implied volatility. Our additional analyses show that combining with an extended GJR-GARCH model, which captures the asymmetric volatility effect, improves the overall performance of VaR models.