Volatility index and the return–volatility relation: Intraday evidence from Chinese options market

Abstract

We use unique intraday data to investigate the validity of the Shanghai Stock Exchange's the revised Chinese implied volatility index (iVX). We find that iVX is an effective barometer for the underlying exchange‐traded fund (ETF) market and can be used as a valid “fear index” when there is anxiety over large drops. Furthermore, we use robust quantile regressions and document the asymmetric relation between returns and iVX changes. We also show that behavioral theories offer better explanations for this asymmetric relation than do fundamental theories. More important, we examine the role of iVX in selecting trading strategies.

Can the Chinese volatility index reflect investor sentiment?

“…Therefore, iVX can simultaneously represent the investors' sentiment in theory. Li et al (2019) find that iVX is negatively associated with the price and return of Shanghai 50ETF separately, which indirectly proves that iVX could reflect investors' panic sentiment, but did not directly measure the sentiment. Regarding the sentiment representation of the VIX created by CBOE, most of the researches take it as the known facts and conduct research on this basis ( Pan, 2018 ; Smales, 2017 ; Yang, Jhang, & Chang, 2016 ).…”

“…Due to the late release of the Chinese volatility index iVX, there are few studies on iVX. The related researches mainly focus on three aspects: the prediction ability of iVX ( Qiao, Teng, Li, et al, 2019 ), the relationship between iVX and the yield, including the “leverage effect” ( Li, Yu, Luo, et al, 2019 ; Yue, Ruan, Gehricke, & Zhang, 2019 ), and the inclusion of volatility index as an indicator in the sentiment index construction system ( Xu & Zhou, 2018 ).…”

Jump activity analysis of the equity index and the corresponding volatility: Evidence from the Chinese market

“…For example, Zheng et al (2017) found that the daily iVIX was positively related to the 50ETF for the period from February 9, 2015 to January 21, 2016. They claimed that in China, the iVIX should be referred to as a “greed index” rather than a “fear index.” Other authors, such as Li et al (2019), argued that although the iVIX was positively related to the 50ETF for the period from February 9, 2015 to February 13, 2018, it was negatively related to the 50ETF during the largest fluctuations and showed a strong negative comovement with the 50ETF, especially the negative returns of the 50ETF. They claimed that the iVIX is a valid “fear index.” Similarly, our results indicate that Type I jumps have a strong negative correlation, especially the negative jumps of the 50ETF.…”

“…The negative correlation of the movements in the iVIX with the 50ETF is the most famous and important property of the iVIX, and this is the reason why it is called a “fear index” (e.g., Li et al, 2019). This viewpoint has been widely used for portfolio hedging and explains the popularity of the iVIX derivative.…”

“…The Shanghai Stock Exchange (SSE) listed 50 exchange‐traded fund (50ETF) options products for the 50ETF asset on February 9, 2015, and in the same month, they launched the corresponding volatility index, which is also known as the implied volatility index (iVIX). Li et al (2019) argued that the iVIX is an effective “barometer” for the asset 50ETF, particularly regarding sharp drops or increases in the 50ETF. In addition, they found that the iVIX has strong forecasting power regarding its 50ETF asset in the short term, particularly during crises.…”