Relationship Between Chinese Option, Volatility Index And The Underlying Market

With the growing of Chinese capital market, the growth of financial derivatives are rapidly as well. 50 ETF option, Chinese first option listed on the Shanghai Stock Exchange on February 9, 2015. It marks the further improvement of our financial derivatives which markets to the world’s major markets, meanwhile it provides a tough support on the stable development of Chinese capital market.As the characteristics, the 50 ETF option is a stock option. However for its underlying market is 50 ETF, a passive index exchange traded fund. It also has the feature of stock index option in some way. Therefore as the first option, 50 ETF option is an experimental product. We choose 50 ETF option as research objective, compare the changes of 50ETF’s volatility on the periods: before and after the introduction of the option, in order to figure out the effect of option to the spot market on stability. In addition, we study the relationship between volatility index CVX which is draw up by the CSI 300 index option and CSI 300 index to judge the effectiveness and functionality of the volatility index.In the empirical analysis of 50 ETF option’s effect on 50ETF’s volatility, we use ARMA model to fit 50ETF’s daily yield and find a volatility gathered by ARCH test. Thereby we establishing a GARCH model and join a dummy, but discover that 50 ETF option do not bring a significant effect to 50 ETF. The conclusion is as follow: option is a way to complete the mechanism of hedging, not a totally new speculative market, so that it will not contribute to the volatility in the underlying market. It has a long simulation trading period before listed, so the investors have fully time to understand the new product and familiar with operation of hedging and arbitrage. 50 ETF is not mainstream product. In second part, we use the same way to analysis the CSI 300 index. In the GARCH model we add CVX change rate as an exogenous variable and draw a conclusion as follow: CVX has a strong correlation with CSI 300 index that is similar to the early period of VIX and S&P500 index. In short term, CVX change rate represent the level of market panic which has negative correlation with CSI 300 index. CVX change rate can forecast the volatility of CSI 300 index in short term.Our study will support two sections. First, it provides basic information for listing more options in further. Second, the research of CVX shows that it has correlation with CSI 300 index which can be used to develop new derivatives.