Abstract
We introduce the China Volatility Index (CNVIX), a model-free volatility index for the Chinese equity market based on ETF options. To construct the CNVIX, we extend the Chicago Board Options Exchange (CBOE) methodology in the emerging Chinese options market. We examine the leverage effect and volatility feedback effect between the CNVIX and the underlying asset, as well as the CNVIX’s return forecastability. Our findings indicate a significant negative asymmetric leverage effect, insignificant volatility feedback effect in the CNVIX, and a positive mean volatility risk premium (VRP), which can forecast the underlying asset’s returns over various horizons.
•We introduce a model-free volatility index in China (CNVIX).•We extend the volatility index methodology in emerging option market with less liquidity.•A significant negative asymmetric leverage effect exists in China but the volatility feedback effect does not.•A positive mean volatility risk premium (VRP) is documented in the Chinese market.•VRP could predict the underlying’s return over different horizons.