Essays on volatility and risk in financial markets

This dissertation examines the volatility in the Eurodollar futures and futures option markets and investigates the risk and the correlated behavior of the group firms in the emerging Korean market.; The first part of the dissertation consists of three essays on market efficiency, the European and American option model validity, and the informational content of volatility. The first essay studies how expectations of future volatility are formed and whether or not historical or implied volatilities actually have any information to explain future realized volatility over the life of the options. This essay compares several versions of both historical and implied volatility estimators in the autocorrelation and heteroscedasticity consistent GMM test to determine some limitations of each estimator and whether one estimator is consistently better. The second essay is about the variance bounds test of market efficiency and model validity. Our tests of the variance bounds inequality suggest that the rationally forecast implied volatility over the life of option fluctuates less than the ex post actual volatility. The third essay examines model validity and market efficiency by another alternative which focuses on the relation between model implied volatility and the strike price of each option. We establish that the strike price bias of implied volatility (smile effect) is strongly related to liquidity as measured by both option trading volume and option open interest.; The second part of the dissertation focuses on the Korea Stock Exchange and examines the behavior of stock returns of the Korean large group firms compared with those of the non-group firms. We first examine the comovement structure of the stock returns within the same group of firms. The mean intra-group correlations of the idiosyncratic stock returns within the same group of firms after removing common factors are expected to be higher than both the mean inter-group correlations and the correlations with the non-group firms. We then investigate how differently the securities of the group firms are priced in the capital market relative to the non-group firms under the framework of the multifactor asset pricing model. The empirical test based on the Fama-MacBeth cross-sectional regression shows that the large group firms outperform the non-group firms after controlling for market systematic risk and firm size effect.