Smirking in the energy market: Evidence from the Chinese crude oil options market

Tian Yue, Lu-Lu Li, Xinfeng Ruan and Jin E. Zhang

International Review of Financial Analysis, 2024, vol. 96, issue PA

Abstract: This study examines the implied volatility (IV) curve and its determinants in the newly established Chinese crude oil options market. Given China’s significant role as a crude oil importer and consumer, understanding this market’s dynamics is crucial for hedging and risk management. The paper identifies a left-skewed smirk in the IV curve, similar to major international options markets, indicating bearish market sentiment. The research analyzes various factors influencing the IV curve’s shape, with findings showing that market fear, measured by the put-to-call ratio (PCR), and the underlying asset’s volatility are primary determinants. The study also examines how the Russo-Ukrainian conflict heightened market fear and volatility, and we find with the onset of the conflict, it fostering optimistic view on the crude oil market. The analysis also highlights the significant impact of U.S. Federal interest rate hikes on the IV shape, emphasizing the inter-connectedness of global financial markets and the necessity for enhanced risk management strategies. These findings offer valuable insights for market participants and regulators regarding risk management in the Chinese crude oil options market.

Keywords: Chinese crude oil options; Implied volatility smirk; Energy derivatives (search for similar items in EconPapers)
JEL-codes: G13 G14 G15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:96:y:2024:i:pa:s1057521924005696

DOI: 10.1016/j.irfa.2024.103637

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