Option Price and Stock Market Momentum in China

Jianping Li, Yanzhen Yao, Yibing Chen and Cheng Few Lee

Chapter 103 in Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning:(In 4 Volumes), 2020, pp 3619-3647 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Option prices tend to be correlated to past stock market returns due to market imperfections. This chapter discuss this issue in Chinese derivative market. Implied volatility spread based on pairs of options is constructed to measure the price pressure in the option market. By regressing the implied volatility spread on past stock returns, we find that past stock returns exert a strong influence on the pricing of index options. Specifically, the SSE 50 ETF calls are significantly overvalued relative to SSE 50 ETF puts after stock price increases, and vice versa. Moreover, we empirically validate that momentum effects in the underlying stock market are responsible for the price pressure. These findings are both economically and statistically significant and have important implications.

Keywords: Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data (search for similar items in EconPapers)
JEL-codes: C01 C1 G32 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789811202391_0103 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789811202391_0103 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789811202391_0103

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().