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Net buying pressure, volatility smile, and abnormal profit of Hang Seng Index options
Author(s) -
Chan Kam C.,
Cheng Louis T. W.,
Lung Peter P.
Publication year - 2004
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20134
Subject(s) - moneyness , volatility (finance) , index (typography) , hang , economics , financial economics , profit (economics) , implied volatility , computer science , microeconomics , operating system , world wide web
We use the net buying pressure hypothesis of N. P. B. Bollen and R. Whaley (2004) to examine the implied volatilities, options premiums, and options trading profits at various time‐intervals across five different moneyness categories of Hong Kong Hang Seng Index (HSI) options. The results show that the hypothesis can well describe the newly developed Hong Kong index options markets. The abnormal trading profits by selling out‐of‐the‐money puts with delta hedge are statistically and economically significant across all options maturities. The findings are robust with or without outlier adjustment. Moreover, we provide two insights about the hypothesis. First, net buying pressure is attributed to hedging activities. Second, the net buying pressure on calls is much weaker than that on put options. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:1165–1194, 2004