The Impact of Net Buying Pressure on Implied Volatility: The Learning Hypothesis Versus the Limits of Arbitrage Hypothesis

54 Pages Posted: 20 Mar 2005

See all articles by Hyoung-jin Park

Hyoung-jin Park

Korea Advanced Institute of Science and Technology (KAIST)

Jangkoo Kang

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Date Written: March 15, 2005

Abstract

This study examines the impacts of net buying pressure on implied volatility, and documents the fact that Bollen and Whaley (2004)'s net buying pressure hypothesis does not hold in the daily data of the KOSPI200 options market. In addition, using intraday data, we show that the net buying pressure of put options lowers implied volatilities and net selling pressure of put options raises implied volatilities, while the net buying pressure of call options raises implied volatilities and the net selling pressure of call options lowers implied volatilities. Moreover, we document the fact that the net buying pressure in the options market leads the stock market return. These facts suggest that option traders in the KOSPI200 options market are directional traders rather than volatility traders, and these facts support the learning hypothesis rather than the limits of arbitrage hypothesis.

Keywords: Net buying pressure, Implied volatility, The volatility learning hypothesis, The direction learning hypothesis, The limit of arbitrage hypothesis, directional trader

JEL Classification: G13, G14

Suggested Citation

Park, Hyoung-jin and Kang, Jangkoo, The Impact of Net Buying Pressure on Implied Volatility: The Learning Hypothesis Versus the Limits of Arbitrage Hypothesis (March 15, 2005). Available at SSRN: https://ssrn.com/abstract=686574 or http://dx.doi.org/10.2139/ssrn.686574

Hyoung-jin Park (Contact Author)

Korea Advanced Institute of Science and Technology (KAIST) ( email )

373-1 Kusong-dong
Yuson-gu
Taejon 305-701, 130-722
Korea, Republic of (South Korea)

Jangkoo Kang

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul 02455
Korea, Republic of (South Korea)
+82 2 958 3521 (Phone)