A State-Price Volatility Index for China's Stock Market

This study derives a volatility index for China's stock market with similar properties to the Chicago Board Options Exchange Volatility Index (the VIX'). A long-term benchmark of historic volatility expectations is here presented for China from 1996 to 2011, called the China- State-Price Volatility (SPV)'. Construction of this index involves the use of SPV methodology, using implied volatility calculated from options on the Hang Seng China Enterprise Index (HSCEI). Historic open-high-low-close volatility on the Shanghai Composite Index (SHCI) is also used to extend the benchmark prior to the availability of HSCEI options data. The China-SPV successfully forecasts realised volatility for the Shanghai Stock Exchange. It also serves as a fear gauge' in that it monitors daily movements of the SHCI in the same way that the VIX monitors the S&P 500 index (Whaley, 2009). The China-SPV evidences an increasing relation with the US market in terms of the dynamic correlation of levels and changes with the VIX since 2004.