Option profit and loss attribution and pricing in the Chinese options market

Carr and Wu (2020) propose a novel options valuation framework that links the fair implied volatility of an option contract to the first and second risk-neutral moments of changes in implied volatility. This paper examines the information inferred from this framework in the SSE 50 options market, specifically assessing whether the inferred estimates can enhance the forecast accuracy of future realized variance and covariance for at-the-money implied volatility series. Our results document that the forecasting power for realized variance is weaker compared to covariance, and the contribution of the forward-looking estimator is consistently smaller than that of the historical estimator.