How do market volatility and risk aversion sentiment inter-influence over time? Evidence from Chinese SSE 50 ETF options

Jue Gong, Gang-Jin Wang, Chi Xie and Gazi Uddin

International Review of Financial Analysis, 2024, vol. 95, issue PB

Abstract: We propose to implement the TVP-VAR-SV model and the spillover index approach to investigate the dynamics of mutual influences between market volatility and risk aversion sentiment (represented by variance risk premium), from aspects of realized variance (RV) and implied variance (IV). We innovatively study the evolution of volatility information transmission mechanisms by analyzing time-varying impulse response and dynamic connectedness in the Chinese market. Upon inspecting shock effects from investor sentiment to RV and IV, we discover that investor sentiment can cause sudden shocks on realized volatility but produce expansive shocks on expected volatility. As we compare spillover effects in call and put options, we find that (i) sentiments in put option contain more volatility information and can affect market volatility, while sentiments in call option primarily perceive volatility spillovers from market volatility, and (ii) investor sentiments in call (put) option become to present more volatility information in a bullish (bearish) market. Our study provides valuable insights on behavioral finance theory and portfolio risk management.

Keywords: Market volatility; Risk aversion sentiment; Investor sentiment; Dynamic volatility spillover; Variance risk premium (search for similar items in EconPapers)
JEL-codes: C32 D80 G40 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924003727

DOI: 10.1016/j.irfa.2024.103440

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