What determines volatility smile in China?

Pengshi Li, Aichuan Xian and Yan Lin

Economic Modelling, 2021, vol. 96, issue C, 326-335

Abstract: The implied volatility for 50 ETF options in China shows a significant smile pattern across different moneyness. Call and put options on 50 ETFs transacted from February 2015 to December 2018 are obtained. Regression and vector autoregression analyses are employed to investigate the structural relationship between the volatility smile and potential determinants. The determinants considered in this study include liquidity variables, market momentum, features of the underlying asset and time to maturity. The empirical results show that time to maturity and uncertainty of the underlying asset are the main determinants of the structure of the volatility smile. Moreover, realized volatility of the underlying asset and liquidity proxy variables, open interest and the trading volume of options contracts, have significant impact on the structure of the volatility smile.

Keywords: Implied volatility; Volatility smile; Options; 50 ETF (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:96:y:2021:i:c:p:326-335

DOI: 10.1016/j.econmod.2020.04.013

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