A Joint Analysis of theKOSPI 200 Option andODAX Option MarketsDynamics

As a function of strike and time to maturity the implied volatilityestimation is a challenging task in nancial econometrics. DynamicSemiparametric Factor Models (DSFM) are a model class that allowsfor the estimation of the implied volatility surface (IVS) in a dynamiccontext, employing semiparametric factor functions and time-varyingloadings. Because nancial asset volatilities move over time, acrossassets and over markets, this paper analyses volatility interaction betweenGerman and Korean stock markets. As proxy for the volatility,factor loadings series derived from a DSFM application on option pricesare employed. We examine volatility transmission between the marketsunder the vector autoregressive (VAR) model framework. Our resultsshow that a shock in the volatility of one market may not translatedirectly into greater uncertainty in another market and it is unlikelythat portfolio investors can benet from diversication among thesemarkets due to cointegration.