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Abstract
Liquidity reflects the quality of the market. When the market is short of liquidity, it often causes investors’ trading difficulties and stock price volatility, expanding the investment risk. As a risk management tool, options attract more informed investors to trade because of their flexible design. To explore whether the implied information based on the formation of option price can predict the liquidity of stock market, we take SSE 50ETF options from February 9, 2015, to December 31, 2020, as the research sample. Based on the idea of data-driven approach, we extract the implied information contained in option price, including implied volatility, implied volatility spread, and variance risk premium. Through the regression analysis method, we examine the ability to predict the liquidity of the stock market. The results show that implied volatility spread has the strongest ability to predict the liquidity of the stock market, and it is more significant within 270 days. Implied volatility contains the information about the short-term (120 days) liquidity of the stock market in the future. It shows that implied volatility and implied volatility spread are good indicators to predict stock market liquidity. In contrast, variance risk premium cannot predict the liquidity of stock market. The research conclusion verifies the role of option-implied information in predicting the stock market’s liquidity. By extracting the information of options price, investors and financial regulators can scientifically participate in the financial market under data guidance.
Highlights
Liquidity, volatility, and profitability are the essential attributes of the financial market, in which liquidity is in the leading position and is the blood and soul of the market [1, 2]
Market width represents the deviation degree of transaction price from effective market price; market depth refers to the maximum number of stocks that can be traded without affecting the current market price; market resiliency refers to the speed at which the price returns to the average level after the completion of a large number of stock transactions; immediacy measures whether investors can complete the transaction in time
The government often adopted the rescue measures, which is equivalent to giving the market a free put option. erefore, in the options market, investors expect the future volatility to be rebalanced, and implied volatility (IV) will be less than the higher RV, resulting in variance risk premium (VRP) less than 0. e mean value of implied volatility spread (IVS) is −0.023
Summary
Volatility, and profitability are the essential attributes of the financial market, in which liquidity is in the leading position and is the blood and soul of the market [1, 2]. Suppose that we can predict the future liquidity of the stock market according to the relevant indicators and make timely trading adjustments. Considering the launch time of CSI 300ETF options, the development and price information in the market is not mature enough. Considering the advantages of data-driven approach in solving related problems, we decided to apply this idea to the stock and option markets. Based on the data of SSE 50ETF options, we calculate the implied volatility (IV), the implied volatility spread (IVS), and the variance risk premiums (VRP), respectively; analyze whether they can predict the liquidity of Chinese A-share market; and verify the daily data.
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