Abstract
This paper investigates whether implied volatility index can be predicted and whether the prediction of implied volatility index can improve option trading performances by checking Hang Seng Index Volatility (VHSI). The results indicate that VHSI can be predicted more accurately when considering day-of-week effect and spillover effect. Furthermore, this paper uses straddle to examine the trading performance with the real data from Hong Kong option trading market. The results suggest that option trading based on the prediction of VHSI can generate extra returns, and model specifications with day-of-week and spillover effects perform better than ones without these two effects. The results also suggest that the prediction of VHSI adds value to practical investors.
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Notes
This paper set the first sample period to start from Jan 2003 with the consideration of 9/11 terrorist attack. During that period the political crisis was huge in United States which impacted the financial markets of the whole world. The fluctuation of stock market is not representative.
The S&P 500 is a free-float capitalization-weighted index of prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ. Different from the Dow Jones index, which focuses on the performance of different industry sectors, Nasdaq is an indicator of performance of stocks of technology and growth companies.
The S&P 500 is a free-float capitalization-weighted index of prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ. Different from the Dow Jones index, which focuses on the performance of different industry sectors, Nasdaq is an indicator of performance of stocks of technology and growth companies.
The time difference between opening of the Hong Kong stock market and closure of the New York Stock Market during weekdays is only 5 h.
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Acknowledgments
We are particularly grateful to two anonymous referees, Dr. Hakan Danis and Merve Aricilar, editors of Eurasian Economic Review, for their constructive comments on the final version of this paper.
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Chen, Y., Lai, K.K. & Du, J. Modeling and forecasting Hang Seng index volatility with day-of-week effect, spillover effect based on ARIMA and HAR. Eurasian Econ Rev 4, 113–132 (2014). https://doi.org/10.1007/s40822-015-0013-x
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DOI: https://doi.org/10.1007/s40822-015-0013-x