| dc.description.abstract | Abstract
This study empirically investigates the TAIEX index options (called TXO) by adopting the Jarrow and Rudd option pricing model. Using the intraday data from April 1, 2002 to December 31, 2003, we got several conclusions. First, recover the risk-neutral distribution from observable option price, we find positive skews and leptokurtosis do exist and give rise to volatility skews. Through adjustment of higher moments, Jarrow-Rudd model shows less misspecification. Second, we focus on the forecast ability of implied volatility. Evidence reveals that implied volatilites from Jarrow-Rudd model and Black-Scholes model both contain information about realized volatility but they are biased predictors. Third, we also test whether the implied skewness or kurtosis are the sources of volatility skews. Empirical results suggest the slope of volatility smile can be explained by the implied skewness and kurtosis while the curvature of that is primarily explained by the fourth moment of RND. In addition, regression analysis shows that risk-neutral skewness is influenced by market-wide factors such as trading volume, implied volatility, index return or put/call ratio. Fourth, we construct TVIX by using the new-VIX calculation methodology produced by CBOE in 2003. Consistent with Whaley (2000), TVIX is negatively related to TAIEX and changes of positive in TVIX can help explain the index return. Moreover, regard Whaley’s regression as the benchmark, empirical implement suggests that sentimental indicators in behavior finance such as trading volume or put/call ratio do have explanatory power on the realized return while implied parameters recovered from Jarrow-Rudd model show less evidence on that. Finally, a discussion about constructing a new fear gauge index is proposed. Our goal is to obtain an indicator that can gauge the investors’ risk-aversion. The new fear gauge index which measures the investors’ realistic expected loss performs better for its negative related to the index level and explanatory power on index return. | en_US |