The volatility index and style rotation: Evidence from the Korean stock market and VKOSPI

Abstract

We investigate whether changes in the implied volatility index (VKOSPI) of the Korean market have predictive power for daily market returns. We find that future returns on large stocks are higher than those on small stocks on days that follow an increase in the VKOSPI. Additionally, we find that future returns on growth stocks are larger than those on value stocks on days following an increase in the VKOSPI. We also provide empirical evidence that a potential trading rule based on changes in the VKOSPI might be profitable. Our findings indicate that the VKOSPI can be used in predicting the performance of large/small and value/growth stocks in practice.