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Volatility risk premium, good volatility and bad volatility: Evidence from SSE 50 ETF options

Author

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  • Li, Zhe
  • Shen, Jiashuang
  • Xiao, Weilin

Abstract

This paper studies the impact of volatility risk premium of SSE 50 ETF options on the price volatility of the underlying securities. After dividing options into different attributes including different types, market conditions and moneyness, we find that options contain implicit volatility information for the underlying securities and volatility risk premium has a significantly positive impact on the realized volatility. We further discuss the effect of options with different attributes on good and bad volatilities. The empirical results show that volatility risk premium has significant influence on both of them. In particular, the impact of volatility risk premium on good volatility is significantly stronger than that of bad volatility. In addition, we investigate the out-of-sample forecast performance of the volatility risk premium on realized volatility. The results show that the implied information content of deep out-of-the-money options has the highest prediction accuracy for weekly good realized volatility.

Suggested Citation

  • Li, Zhe & Shen, Jiashuang & Xiao, Weilin, 2024. "Volatility risk premium, good volatility and bad volatility: Evidence from SSE 50 ETF options," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:ecofin:v:74:y:2024:i:c:s1062940824001311
    DOI: 10.1016/j.najef.2024.102206
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    More about this item

    Keywords

    Option-implied information; Volatility risk premium; Good volatility; Bad volatility; SSE 50 ETF options;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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