Does Options Trading Affect Volatility Of The Underlying Asset In The Chinese Stock Market?

The impact of options introduction on the underlying stock has been a debatable topic among researchers for the past decades.The question is quite controversial since conflicting results have been obtained by researchers in various stock markets with different sample period and methodology.The objective of this study is to examine the volatility and the level of leverage effect on the underlying stock after option introduction on China 50ETF in the short and long run.I examined the volatility and level of leverage effect by using a sample data of China 50 ETF.Using Exponential GARCH and Realized GARCH model,I introduced a dummy variable in the variance equations to capture the change of the volatility of China 50 ETF returns before and after options introduction.By comparing the estimated coefficient for both the short and long run I found that in the short run,the introduction of options on China 50 ETF increased the spot return volatility while in the long run,the introduction of options on China 50 ETF had no significant effect on the spot return volatility.The reason may be because,at the beginning of the introduction,lots of speculators joined in the market and made the market more volatile.However,as time goes by,the arbitragers and institutional investors joined in the market and make the market more efficient.Also,with respect to the leverage effect/asymmetry responds while reduction in leverage effect was observed in the short run,the long run exhibit an increase in the asymmetry responds to shock after the introduction of options.