The Dynamics of Option Volatility Smirk and Option Returns Predictability: Evidence From Chinese SSE50 ETF Options
ABSTRACT We examine the predictive ability of risk‐neutral moments extracted from option volatility smirks for the option delta‐neutral returns using the SSE50 ETF stock index option. We find risk‐neutral skewness changes over market conditions. The risk‐neutral skewness significantly predicts 1‐day, 2‐day, and 1–4 weeks ahead call option returns with negative signs in both in‐sample and out‐of‐sample tests. The results are robust in including other control variables and different constant maturity risk‐neutral skewnesses. Trading strategies based on the predictive model yield a potential maximum annual return of 293%.
Authors
- Dehong Liu (ORCID: https://orcid.org/0000-0002-0969-8498)
- Carl R. Chen (ORCID: https://orcid.org/0000-0003-1586-8403)
- Peter P. Lung
- Wenxin Guo
Institutions
- University of Dayton (US)
- University of Denver (US)
- Beijing Jiaotong University (CN)
Publication Details
- Journal
- Journal of Futures Markets
- Published
- 2025-04-23
- DOI
- https://doi.org/10.1002/fut.22590
- Citations
- 1
- Primary Topic
- Stochastic processes and financial applications
- Type
- article
- Field-Weighted Citation Impact
- 2.21