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The volatility index and volatility risk premium in China

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  • Yue, Tian
  • Ruan, Xinfeng
  • Gehricke, Sebastian
  • Zhang, Jin E.

Abstract

We introduce the China Volatility Index (CNVIX), a model-free volatility index for the Chinese equity market based on ETF options. To construct the CNVIX, we extend the Chicago Board Options Exchange (CBOE) methodology in the emerging Chinese options market. We examine the leverage effect and volatility feedback effect between the CNVIX and the underlying asset, as well as the CNVIX’s return forecastability. Our findings indicate a significant negative asymmetric leverage effect, insignificant volatility feedback effect in the CNVIX, and a positive mean volatility risk premium (VRP), which can forecast the underlying asset’s returns over various horizons.

Suggested Citation

  • Yue, Tian & Ruan, Xinfeng & Gehricke, Sebastian & Zhang, Jin E., 2023. "The volatility index and volatility risk premium in China," The Quarterly Review of Economics and Finance, Elsevier, vol. 91(C), pages 40-55.
    • Handle: RePEc:eee:quaeco:v:91:y:2023:i:c:p:40-55
    DOI: 10.1016/j.qref.2023.07.004
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    More about this item

    Keywords

    Model-free Volatility Index; ETF Options; Volatility Risk Premium; Emerging option market; China;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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