The Impact of Net Buying Pressure on Implied Volatility

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.