Index volatility and the put-call ratio: a tale of three markets

This paper investigates the influence of the put-call-ratio (PCR) implied by the Shanghai Stock Exchange (SSE) 50 ETF option on the price discovery process of the SSE50 index, on both the spot and the futures markets. By constructing an asymmetric VARX-MGARCH model, this paper examines the relations...

Full description

Saved in:
Bibliographic Details
Published in:Quantitative finance 2020-12, Vol.20 (12), p.1983-1996
Main Authors: Gang, Jianhua, Huang, Nan, Song, Ke, Zhang, Ruyi
Format: Article
Language:English
Subjects:
Futures
MGARCH
Option
PCR
SSE50-ETF
Volatility
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This paper investigates the influence of the put-call-ratio (PCR) implied by the Shanghai Stock Exchange (SSE) 50 ETF option on the price discovery process of the SSE50 index, on both the spot and the futures markets. By constructing an asymmetric VARX-MGARCH model, this paper examines the relationship between the PCRs and SSE50 index (futures). Empirical results indicate an asymmetric V-shaped relationship between the PCRs and the conditional volatility of the stock index returns and the index futures returns. The conditional volatility increases as the PCRs deviate widely from the mean. This study suggests that the PCRs implemented in many trading practices may be misused, because there is no evidence that the PCRs and index returns are correlated. Instead, this research implies a different way of using them: to trade volatility.
ISSN:1469-7688
1469-7696
DOI:10.1080/14697688.2020.1814009