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A State‐Price Volatility Index for China's Stock Market
Author(s) -
O'Neill Michael,
Wang Kent,
Liu Zhangxin Frank
Publication year - 2016
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12124
Subject(s) - volatility (finance) , volatility swap , composite index , forward volatility , china , financial economics , volatility risk premium , capitalization weighted index , stock exchange , economics , implied volatility , index (typography) , econometrics , stock market index , volatility smile , stock market , variance swap , monetary economics , finance , geography , computer science , context (archaeology) , archaeology , world wide web
This study derives a volatility index for China's stock market with similar properties to the Chicago Board Options Exchange Volatility Index (the ‘ VIX ’). A long‐term benchmark of historic volatility expectations is here presented for China from 1996 to 2011, called the ‘China‐ State‐Price Volatility ( SPV )’. Construction of this index involves the use of SPV methodology, using implied volatility calculated from options on the Hang Seng China Enterprise Index ( HSCEI ). Historic open–high–low–close volatility on the Shanghai Composite Index ( SHCI ) is also used to extend the benchmark prior to the availability of HSCEI options data. The China‐ SPV successfully forecasts realised volatility for the Shanghai Stock Exchange. It also serves as a ‘fear gauge’ in that it monitors daily movements of the SHCI in the same way that the VIX monitors the S&P 500 index (Whaley, 2009). The China‐ SPV evidences an increasing relation with the US market in terms of the dynamic correlation of levels and changes with the VIX since 2004.