The COVID-19 risk in the Chinese option market

Jianhui Li*, Xinfeng Ruan, Sebastian A. Gehricke, Jin E. Zhang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

The COVID-19 pandemic has increased fear of a financial market crash in China. We use an implied volatility slope measure, which proxies the cost of option protection against and therefore trader's fear of crash risk, using the Shanghai Shenzhen CSI 300 Index options. We show that this measure is positively related to new cases and deaths of the pandemic during the COVID-19 outbreak in China. Option traders are willing to pay more for hedging downside tail risk as the pandemic worsens, and are no longer as concerned by news of cases and deaths after the lift of the lockdown.

Original languageEnglish
Pages (from-to)346-355
Number of pages10
JournalInternational Review of Finance
Volume22
Issue number2
DOIs
Publication statusPublished - Jun 2022
Externally publishedYes

Keywords

  • COVID-19
  • CSI 300 Index options
  • implied volatility slopes
  • tail risk

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