The COVID-19 risk in the Chinese option market

Jianhui Li; Xinfeng Ruan; Sebastian A. Gehricke; Jin E. Zhang

doi:10.1111/irfi.12365

The COVID-19 risk in the Chinese option market

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

^*Corresponding author for this work

University of Otago

Research output: Contribution to journal › Article › peer-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 language	English
Pages (from-to)	346-355
Number of pages	10
Journal	International Review of Finance
Volume	22
Issue number	2
DOIs	https://doi.org/10.1111/irfi.12365
Publication status	Published - Jun 2022
Externally published	Yes

Keywords

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

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10.1111/irfi.12365

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title = "The COVID-19 risk in the Chinese option market",

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.",

keywords = "COVID-19, CSI 300 Index options, implied volatility slopes, tail risk",

author = "Jianhui Li and Xinfeng Ruan and Gehricke, {Sebastian A.} and Zhang, {Jin E.}",

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year = "2022",

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AU - Li, Jianhui

AU - Ruan, Xinfeng

AU - Gehricke, Sebastian A.

AU - Zhang, Jin E.

PY - 2022/6

Y1 - 2022/6

N2 - 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.

AB - 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.

KW - COVID-19

KW - CSI 300 Index options

KW - implied volatility slopes

KW - tail risk

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DO - 10.1111/irfi.12365

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VL - 22

SP - 346

EP - 355

JO - International Review of Finance

JF - International Review of Finance

IS - 2

ER -

The COVID-19 risk in the Chinese option market

Abstract

Keywords

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