IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Distilling private information from plain-vanilla options to predict future underlying stock price volatility: Evidence from the H-shares of Chinese banks

Listed author(s):
  • Koutmos, Dimitrios
Registered author(s):

    Deviations from put-call parity may arise in response to private information that a select group of investors possess. From a practical perspective, if one possesses private information, using options to speculate or hedge amplifies potential gains given the leverage embedded in options with respect to price changes in the underlying asset. In light of this, and if we assume that the average investor does not possess private information, it is perhaps possible though to infer such information through implied variance spreads and use it to predict future volatility in the underlying asset. In this piece I examine the extent to which such information is economically informative in predicting the intraday return variability of H-shares issued by China's state and joint-stock banks, respectively. Generally speaking, I uncover the following; firstly, call-put implied variance spreads are mean-reverting across time. Secondly, at any given point in time, the magnitude of the deviation from put-call parity is informative in predicting rises in future spot price volatility. Thirdly, straddle/strangle trades predict, at times one week in advance, rises in future spot price volatility. These findings hold after controlling for market-wide implied volatility, the flow and shock in information disseminating to the market, and implicit transactions costs.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0275531916300174
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Research in International Business and Finance.

    Volume (Year): 37 (2016)
    Issue (Month): C ()
    Pages: 391-405

    as
    in new window

    Handle: RePEc:eee:riibaf:v:37:y:2016:i:c:p:391-405
    DOI: 10.1016/j.ribaf.2016.01.017
    Contact details of provider: Web page: http://www.elsevier.com/locate/ribaf

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Campbell, John Y. & Hentschel, Ludger, 1992. "No news is good news *1: An asymmetric model of changing volatility in stock returns," Journal of Financial Economics, Elsevier, vol. 31(3), pages 281-318, June.
    2. Garman, Mark B & Klass, Michael J, 1980. "On the Estimation of Security Price Volatilities from Historical Data," The Journal of Business, University of Chicago Press, vol. 53(1), pages 67-78, January.
    3. Martens, Martin & van Dijk, Dick, 2007. "Measuring volatility with the realized range," Journal of Econometrics, Elsevier, vol. 138(1), pages 181-207, May.
    4. Turan G. Bali & Armen Hovakimian, 2009. "Volatility Spreads and Expected Stock Returns," Management Science, INFORMS, vol. 55(11), pages 1797-1812, November.
    5. Xing, Yuhang & Zhang, Xiaoyan & Zhao, Rui, 2010. "What Does the Individual Option Volatility Smirk Tell Us About Future Equity Returns?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(03), pages 641-662, June.
    6. Zhao, Hua, 2010. "Dynamic relationship between exchange rate and stock price: Evidence from China," Research in International Business and Finance, Elsevier, vol. 24(2), pages 103-112, June.
    7. Cremers, Martijn & Weinbaum, David, 2010. "Deviations from Put-Call Parity and Stock Return Predictability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(02), pages 335-367, April.
    8. Chin‐Ho Chen & Huimin Chung & Shu‐Fang Yuan, 2014. "Deviations from Put–Call Parity and Volatility Prediction: Evidence from the Taiwan Index Option Market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 34(12), pages 1122-1145, December.
    9. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2009. "Bank ownership and efficiency in China: What will happen in the world's largest nation?," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 113-130, January.
    10. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
    11. Koutmos, Dimitrios, 2012. "An intertemporal capital asset pricing model with heterogeneous expectations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1176-1187.
    12. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    13. Shih, Victor & Zhang, Qi & Liu, Mingxing, 2007. "Comparing the performance of Chinese banks: A principal component approach," China Economic Review, Elsevier, vol. 18(1), pages 15-34.
    14. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    15. Fifield, Suzanne G.M. & Jetty, Juliana, 2008. "Further evidence on the efficiency of the Chinese stock markets: A note," Research in International Business and Finance, Elsevier, vol. 22(3), pages 351-361, September.
    16. David Easley & Maureen O'Hara & P.S. Srinivas, 1998. "Option Volume and Stock Prices: Evidence on Where Informed Traders Trade," Journal of Finance, American Finance Association, vol. 53(2), pages 431-465, 04.
    17. Koutmos, Dimitrios & Song, Wei, 2014. "Speculative dynamics and price behavior in the Shanghai Stock Exchange," Research in International Business and Finance, Elsevier, vol. 31(C), pages 74-86.
    18. Atilgan, Yigit, 2014. "Volatility spreads and earnings announcement returns," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 205-215.
    19. Lagoarde-Segot, Thomas, 2009. "Financial reforms and time-varying microstructures in emerging equity markets," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1755-1769, October.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:riibaf:v:37:y:2016:i:c:p:391-405. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.