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Put-call ratio predictability of the 50ETF option

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  • Jianhua Gang
  • Yang Zhao
  • Xinchen Ma

Abstract

This article investigates the predictive power of the put-call ratios (PCRs) implied by China’s 50ETF option on the 50ETF return and its variance. By using simple partitional regressions, the relationship between the PCR and the 50ETF return is tested. This study conducts tests on their robustness based on different horizons, market conditions, moneyness status and time to maturity. Empirical results indicate that the PCR is a strong forward-looking indicator of the variance of 50ETF returns. A robust and negative correlation is detected. A significant linear correlation between the PCR and the 50ETF return only exists during the market crash. This study shows evidence that the PCR as seen in common trading practices may be misused and indicates a potential way of using it.

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  • Jianhua Gang & Yang Zhao & Xinchen Ma, 2019. "Put-call ratio predictability of the 50ETF option," Economic and Political Studies, Taylor & Francis Journals, vol. 7(3), pages 352-376, July.
    • Handle: RePEc:taf:repsxx:v:7:y:2019:i:3:p:352-376
    DOI: 10.1080/20954816.2019.1633823
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    Cited by:

    1. Afees A. Salisu & Abdulsalam Abidemi Sikiru & Philip C. Omoke, 2023. "COVID-19 pandemic and financial innovations," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(4), pages 3885-3904, August.

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