Index volatility and the put-call ratio: a tale of three markets

Jianhua Gang, Nan Huang, Ke Song and Ruyi Zhang

Quantitative Finance, 2020, vol. 20, issue 12, 1983-1996

Abstract: This paper investigates the influence of the put-call-ratio (PCR) implied by the Shanghai Stock Exchange (SSE) 50 ETF option on the price discovery process of the SSE50 index, on both the spot and the futures markets. By constructing an asymmetric VARX-MGARCH model, this paper examines the relationship between the PCRs and SSE50 index (futures). Empirical results indicate an asymmetric V-shaped relationship between the PCRs and the conditional volatility of the stock index returns and the index futures returns. The conditional volatility increases as the PCRs deviate widely from the mean. This study suggests that the PCRs implemented in many trading practices may be misused, because there is no evidence that the PCRs and index returns are correlated. Instead, this research implies a different way of using them: to trade volatility.

Date: 2020
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DOI: 10.1080/14697688.2020.1814009

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