Bhabra, G. S.; Gonzalez, M. L.; Sup, K. M.; and Powell, J. G., Did option traders predict the Korean financial crisis of 1997?, Department of Economics, University of Wollongong, 1999.
This paper examines KOSPI200 options prices in order to investigate whether implied volatility implicit in options prices foreshadowed the 1997 financial crisis in Korea. A set of call and put implied volatilities are examined for evidence of expectations prior to October 23, 1997 of an impending financial crisis. It is shown that implied volatilities from out-of-the-money calls were relatively higher than those from otherwise identical puts during the period preceding October 23, 1997. Thereafter, however, put implied volatilities became extremely high relative to call implied volatilities. These results indicate no strong fears about the financial crisis during the three months immediately preceding the financial crisis, so KOSPI200 options prices indicate that options traders failed to detect the financial crisis prior to October 23, 1997.