The COVID‐19 risk in the Chinese option market

• Published date: 01 June 2022
• Author: Jianhui Li,Xinfeng Ruan,Sebastian A. Gehricke,Jin E. Zhang
• Date: 01 June 2022
• DOI: http://doi.org/10.1111/irfi.12365

SHORT REPORT

The COVID-19 risk in the Chinese option market

Jianhui Li | Xinfeng Ruan | Sebastian A. Gehricke |

Jin E. Zhang

Department of Accountancy and Finance,

Otago Business School, University of Otago,

Dunedin, New Zealand

Correspondence

Jianhui Li, Department of Accountancy and

Finance, Otago Business School, University of

Otago, Dunedin 9054, New Zealand.

Email: liji1479@student.otago.ac.nz

Funding information

University of Otago and the National Natural

Science Foundation of China, Grant/Award

Number: 71771199

Abstract

The COVID-19 pandemic has increased fear of a financial

market crash in China. We use an implied volatility slope mea-

sure, which proxies the cost of option protection against and

therefore trader's fear of crash risk, using the Shanghai

Shenzhen CSI 300 Index options. We show that this measure

is positively related to new cases and deaths of the pandemic

during the COVID-19 outbreak in China. Option traders are

willing to pay more for hedging downside tail risk as the pan-

demic worsens, and are no longer as concerned by news of

cases and deaths after the lift of the lockdown.

KEYWORDS

COVID-19, CSI 300 Index options, implied volatility slopes,

tail risk

INTRODUCTION

The COVID-19 outbreak originated in the city of Wuhan, China, in December 2019. The virus had spread to other

cities in China and many other countries in less than a month. China instigated the lockdown in Wuhan on January

23, 2020, which had a great effect in containing the spread of the virus (Yuan et al., 2020). On April 8, 2020, when

Wuhan had reported zero daily cases of infection and deaths for the most days in 3 weeks, China lifted the lockdown

in Wuhan, marking the beginning of China's return to normality. In this article, we explore the Chinese equity option

market's sensitivity to the COVID-19 severity during the lockdown of Wuhan, that is, from January 23, 2020 to April

9, 2020 (the lockdown period, hereinafter).

We employ a unique dataset of the Shanghai Shenzhen CSI 300 Stock Index (CSI 300 Index) options to examine

the impact of COVID-19 on Chinese option traders', the most sophisticated investors, expectations, and the hedging

costs of crash risk. CSI 300 Index options were launched on December 23, 2019 by the China Financial Futures

Exchange (CFFEX). It is China's first and only mainland stock index option market. The CSI 300 Index options provide

six maturities, including those for the next 3 months and the final month of each of the following three quarters. The

Received: 24 February 2021 Revised: 5 July 2021 Accepted: 9 August 2021

DOI: 10.1111/irfi.12365

© 2021 International Review of Finance Ltd.

346 International Review of Finance. 2022;22:346–355.

wileyonlinelibrary.com/journal/irfi