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Option Price and Stock Market Momentum in China

In: HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING

Author

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  • Jianping Li
  • Yanzhen Yao
  • Yibing Chen
  • Cheng Few Lee

Abstract

Option prices tend to be correlated to past stock market returns due to market imperfections. This chapter discuss this issue in Chinese derivative market. Implied volatility spread based on pairs of options is constructed to measure the price pressure in the option market. By regressing the implied volatility spread on past stock returns, we find that past stock returns exert a strong influence on the pricing of index options. Specifically, the SSE 50 ETF calls are significantly overvalued relative to SSE 50 ETF puts after stock price increases, and vice versa. Moreover, we empirically validate that momentum effects in the underlying stock market are responsible for the price pressure. These findings are both economically and statistically significant and have important implications.

Suggested Citation

  • Jianping Li & Yanzhen Yao & Yibing Chen & Cheng Few Lee, 2020. "Option Price and Stock Market Momentum in China," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 103, pages 3619-3647, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811202391_0103
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    Cited by:

    1. Kai Biehl & Franziska Disslbacher & Michael Ertl & Georg Feigl & Julia Hofmann & Markus Marterbauer & Patrick Mokre & Reinhold Russinger & Matthias Schnetzer & Jana Schultheiss & Tobias Schweitzer & T, 2020. "Der österreichische Sozialstaat in der Covid-19-Krise," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 46(4), pages 487-500.

    More about this item

    Keywords

    Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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