Volatility model applications in China's SSE50 options market

Yeguang Chi, Wenyan Hao and Yifei Zhang

Journal of Futures Markets, 2022, vol. 42, issue 9, 1704-1720

Abstract: We investigate the effectiveness of various volatility models using China's Shanghai Stock Exchange‐50 (SSE50) Index. Regarding in‐sample fit, the generalized autoregressive conditional heteroscedasticity (GARCH) and the variants of the GARCH model perform much better than the autoregressive conditional heteroscedasticity model. However, we do not observe any significant asymmetric volatility response to past returns in the GJR–GARCH model. For out‐of‐sample forecasting of the future realized volatility, in five of the seven options we investigate, the GARCH volatility forecast outperforms the option implied volatility. We formulate a trading strategy by exploiting the spread between the GARCH volatility forecast and the option implied volatility, and show robust profits when applied to the SSE50 options.

Date: 2022
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