Volatility model applications in China's SSE50 options market. Issue 9 (7th December 2021)

• Record Type: Journal Article
• Authors: Chi, Yeguang; Hao, Wenyan; Zhang, Yifei
• Is Part Of: Journal of futures markets. Volume 42:Issue 9(2022)
• Page Start: 1704
• Page End: 1720
• Publication Date: 2021-12-07
• Subjects: Chinese stock market -- market efficiency -- option pricing -- volatility estimation -- volatility forecasting; Commodity exchanges -- Periodicals; Foreign exchange futures -- Periodicals; 332.632
• DOI: 10.1002/fut.22294
• Languages: English
• ISSNs: 0270-7314

Abstract

Abstract: We investigate the effectiveness of various volatility models using China's Shanghai Stock Exchange‐50 (SSE50) Index. Regarding in‐sample fit, the generalized autoregressive conditional heteroscedasticity (GARCH) and the variants of the GARCH model perform much better than the autoregressive conditional heteroscedasticity model. However, we do not observe any significant asymmetric volatility response to past returns in the GJR–GARCH model. For out‐of‐sample forecasting of the future realized volatility, in five of the seven options we investigate, the GARCH volatility forecast outperforms the option implied volatility. We formulate a trading strategy by exploiting the spread between the GARCH volatility forecast and the option implied volatility, and show robust profits when applied to the SSE50 options.