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Which volatility model for option valuation in China? Empirical evidence from SSE 50 ETF options

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  • Zhuo Huang
  • Chen Tong
  • Tianyi Wang

Abstract

In early 2015, China launched its first exchange-traded option, the Shanghai Stock Exchange (SSE) 50 ETF option, to meet the increasing demand for financial derivatives. In this article, we provide an intensive empirical investigation of popular discrete-time volatility models in terms of their pricing performance when applied to SSE 50 ETF options. We find that the newly developed models with realized measures significantly outperform conventional GARCH-type models based on daily returns only. In contrast with the U.S. market, our empirical results suggest that the leverage effect is very weak in the Chinese option market.

Suggested Citation

  • Zhuo Huang & Chen Tong & Tianyi Wang, 2020. "Which volatility model for option valuation in China? Empirical evidence from SSE 50 ETF options," Applied Economics, Taylor & Francis Journals, vol. 52(17), pages 1866-1880, April.
    • Handle: RePEc:taf:applec:v:52:y:2020:i:17:p:1866-1880
    DOI: 10.1080/00036846.2019.1679348
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    Cited by:

    1. Chen Tong & Zhuo Huang & Tianyi Wang, 2022. "Do VIX futures contribute to the valuation of VIX options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(9), pages 1644-1664, September.
    2. Huang, Shoude & Guo, Xunxiang, 2022. "Valuation of European-style vulnerable options under the non-affine stochastic volatility and double exponential jump," Chaos, Solitons & Fractals, Elsevier, vol. 158(C).
    3. Fan, Qingqian & Feng, Sixian, 2022. "An empirical study on the characterization of implied volatility and pricing in the Chinese option market," Finance Research Letters, Elsevier, vol. 49(C).
    4. Chen Tong & Zhuo Huang, 2021. "Pricing VIX options with realized volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(8), pages 1180-1200, August.
    5. Yue, Tian & Zhang, Jin E. & Tan, Eric K.M., 2020. "The Chinese equity index options market," Emerging Markets Review, Elsevier, vol. 45(C).

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