Study On The Effect Of China's Stock Index Option

Stock Index Option is one of the most widely used financial derivatives to speculation and hedge in the financial industry. Since the 1980 s, the stock index option has been developed for more than forty years. As China financial market is growing rapidly, many investors suggest that we should launch our own stock index option. Besides, the China financial futures exchange has begun the simulation trading of option and it means that option will be traded formally sooner or later. It is universally acknowledged that the essence of trading option is trading volatility. So not only the academics but also financial regulators are very concerned about the volatility impact after the trading of option.The article focuses on the stock index option area. We use the agent-based computational method by computer to make an artificial stock index futures and option market to study the possible volatility change after the launch of option. We use the standard deviation as a measure of volatility. We analyze the influence of the stock index option trading on the futures market volatility by using the GARCH(1,1) model. To help our analysis, we introduce a dummy variable D. On one hand, if D is larger than zero, it means that the option trading increases the original futures volatility. On the other hand, if D is smaller than zero, it means that option trading decreases the original futures volatility. The higher the dummy variable, the more influence of option trading. Furthermore, we changed the number of arbitragers and find that option trading decreases the original futures volatility and the more arbitragers exist, the lower the market volatility.The experience result can be explained by the following reasons. First the investors use the stock index option to hedge the systematic risk of the stock market. When the stock price is going down, investors can buy put option instead of selling stocks, which could help avoid the large drawdown of the spot market. Second, the arbitragers in the futures and option market could increase the market efficiency and help achieve the price discovery, and in this way it also decreases the overall market volatility. The regulator should make appropriate margin system and educate investors well. The complete risk management is of great importance for our stock index option market.