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

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  • Jianhua Gang
  • Nan Huang
  • Ke Song
  • Ruyi Zhang

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.

Suggested Citation

  • Jianhua Gang & Nan Huang & Ke Song & Ruyi Zhang, 2020. "Index volatility and the put-call ratio: a tale of three markets," Quantitative Finance, Taylor & Francis Journals, vol. 20(12), pages 1983-1996, December.
    • Handle: RePEc:taf:quantf:v:20:y:2020:i:12:p:1983-1996
    DOI: 10.1080/14697688.2020.1814009
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    Cited by:

    1. Xingguo Luo & Yuting Lin & Xiaoli Yu & Feng He, 2021. "How trading in commodity futures option markets impacts commodity futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(8), pages 1333-1347, August.
    2. Li, Yubin & Zhao, Chen & Zhong, Zhaodong (Ken), 2021. "Trading behavior of retail investors in derivatives markets: Evidence from Mini options," Journal of Banking & Finance, Elsevier, vol. 133(C).

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