Risk appetite and option prices: Evidence from the Chinese SSE50 options market

Abstract

This paper studies the relationship between risk appetite and the shape of the implied volatility function for SSE 50ETF options, and examines whether the effects of risk appetite differ on that of call and put options. We propose a new measure of risk appetite using high-frequency data in the stock market. Empirical results show that risk appetite has a significant impact on the level and slope of the implied volatility function, with significant differences between call and put options. In addition, we also find that risk appetite has an obvious asymmetric impact on option prices under the leverage effect.