The Effect of Index Option Trading on Stock Market Volatility in China: An Empirical Investigation

Kai Wu, Yi Liu and Weiyang Feng
Additional contact information
Yi Liu: School of Business, Stevens Institute of Technology, Hoboken, NJ 07030, USA
Weiyang Feng: Department of Mathematics, University of Chicago, Chicago, IL 60637, USA

JRFM, 2022, vol. 15, issue 4, 1-19

Abstract: In this study, we examine the effect of introducing SSE 50ETF index options trading on stock market volatility using a panel data evaluation approach. Based on the cross-sectional dependence among international stock indices and macroeconomic indicators, we estimate the counterfactual volatility of the SSE 50 index and find that the introduction of index options reduces stock market volatility significantly in the long term. The primary findings are robust to alternative econometric models, including principal component analysis, GARCH-family model, and LASSO regression. The results of this paper suggest that the introduction of SSE index options provides investors with risk management tools and improves price discovery in the stock market.

Keywords: stock market volatility; panel data; GARCH; counterfactual; LASSO (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/1911-8074/15/4/150/pdf (application/pdf)
https://www.mdpi.com/1911-8074/15/4/150/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jjrfmx:v:15:y:2022:i:4:p:150-:d:778684

Access Statistics for this article

JRFM is currently edited by Ms. Chelthy Cheng

More articles in JRFM from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().