Work

Effectiveness of domain stabilization: A broader perspective

Year: 2025

Type: article

Abstract: This study evaluates the effectiveness of domain stabilization (DS) in mitigating the impact of truncation on model-free implied moment estimation in a new market context. Using refined daily data from the KOSPI200 options market, we address a research gap by linking implied moments to contemporaneous prices and market events. When DS is applied, implied moments more effectively explain contemporaneous underlying price levels and log returns. The in-sample return predictability and out-of-sample forecasting performance of implied moment estimates also improve with DS, albeit to a slightly lesser extent than observed in the U.S. market. Even in an emerging market, DS enhances the informational content of implied moment estimates, strengthening their explanatory power for underlying prices and returns as well as their predictive and forecasting capabilities.

Source: International Review of Economics & Finance

DOI: 10.1016/j.iref.2025.104799

Authors: Geul Lee, Jing Chen, Doojin Ryu

Institutions: Pusan National University, Cardiff University, Sungkyunkwan University

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $1,930

Funders: Sungkyunkwan University, Ministry of Education, Ministry of Education, India, Seoul Metropolitan Government Seoul National University Boramae Medical Center