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The COVID‐19 risk in the Chinese option market

Author

Listed:
  • Jianhui Li
  • Xinfeng Ruan
  • Sebastian A. Gehricke
  • Jin E. Zhang

Abstract

The COVID‐19 pandemic has increased fear of a financial market crash in China. We use an implied volatility slope measure, which proxies the cost of option protection against and therefore trader's fear of crash risk, using the Shanghai Shenzhen CSI 300 Index options. We show that this measure is positively related to new cases and deaths of the pandemic during the COVID‐19 outbreak in China. Option traders are willing to pay more for hedging downside tail risk as the pandemic worsens, and are no longer as concerned by news of cases and deaths after the lift of the lockdown.

Suggested Citation

  • Jianhui Li & Xinfeng Ruan & Sebastian A. Gehricke & Jin E. Zhang, 2022. "The COVID‐19 risk in the Chinese option market," International Review of Finance, International Review of Finance Ltd., vol. 22(2), pages 346-355, June.
    • Handle: RePEc:bla:irvfin:v:22:y:2022:i:2:p:346-355
    DOI: 10.1111/irfi.12365
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    References listed on IDEAS

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    4. Bryan Kelly & Ľuboš Pástor & Pietro Veronesi, 2016. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," Journal of Finance, American Finance Association, vol. 71(5), pages 2417-2480, October.
    5. Claudiu Albulescu, 2020. "Coronavirus and financial volatility: 40 days of fasting and fear," Papers 2003.04005, arXiv.org.
    6. Zaremba, Adam & Kizys, Renatas & Aharon, David Y. & Demir, Ender, 2020. "Infected Markets: Novel Coronavirus, Government Interventions, and Stock Return Volatility around the Globe," Finance Research Letters, Elsevier, vol. 35(C).
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    Cited by:

    1. Jia, Xiaolan & Fan, Zheqi & Ruan, Xinfeng, 2025. "Option profit and loss attribution and pricing in the Chinese options market," Pacific-Basin Finance Journal, Elsevier, vol. 91(C).
    2. Lockwood, Jimmy & Lockwood, Larry & Miao, Hong & Ramchander, Sanjay & Yang, Dongxiao, 2022. "The information content of ETF options," Global Finance Journal, Elsevier, vol. 53(C).

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