How do US options traders “smirk” on China? Evidence from FXI options

Jianhui Li, Sebastian A. Gehricke and Jin E. Zhang

Journal of Futures Markets, 2019, vol. 39, issue 11, 1450-1470

Abstract: In this paper, we study the implied volatility smirk (IVS) of options written on the FXI, the Financial Times Stock Exchange/Xinhua China 50 Index exchange‐traded fund (ETF). Using the methodology of Zhang and Xiang (2008, Quant Financ, 8, pp. 263–284), we document the empirical characteristics of the level, slope, and curvature of IVS of the FXI options. We find that, on average, IVS becomes steeper and more convex as time to maturity increases. The level and curvature are usually positive, and the slope is negative. We provide evidence that the information in the quantified IV factors has some predictive power for the future monthly FXI ETF returns.

Date: 2019
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