Volatility risk premium, good volatility and bad volatility: Evidence from SSE 50 ETF options

Zhe Li, Jiashuang Shen and Weilin Xiao

The North American Journal of Economics and Finance, 2024, vol. 74, issue C

Abstract: This paper studies the impact of volatility risk premium of SSE 50 ETF options on the price volatility of the underlying securities. After dividing options into different attributes including different types, market conditions and moneyness, we find that options contain implicit volatility information for the underlying securities and volatility risk premium has a significantly positive impact on the realized volatility. We further discuss the effect of options with different attributes on good and bad volatilities. The empirical results show that volatility risk premium has significant influence on both of them. In particular, the impact of volatility risk premium on good volatility is significantly stronger than that of bad volatility. In addition, we investigate the out-of-sample forecast performance of the volatility risk premium on realized volatility. The results show that the implied information content of deep out-of-the-money options has the highest prediction accuracy for weekly good realized volatility.

Keywords: Option-implied information; Volatility risk premium; Good volatility; Bad volatility; SSE 50 ETF options (search for similar items in EconPapers)
JEL-codes: E44 G10 G15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:74:y:2024:i:c:s1062940824001311

DOI: 10.1016/j.najef.2024.102206

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