Title

A state-price volatility index for China's stock market

Date of this Version

4-2015

Document Type

Journal Article

Publication Details

Citation only

O'Neill, M., Wang, K., & Liu, Z. (2015, online). A state-price volatility index for China's stock market. Accounting and Finance.

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2015 HERDC submission

Copyright © 2015 AFAANZ

ISSN

0810-5391

Abstract

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 ShanghaiComposite 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 itmonitors dailymovements 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.

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This document has been peer reviewed.