Abstract

This paper focuses on examining the intertemporal dynamic relationships between the stock index and the premium of index options, and between the volatility of stock index and the premium of index options. The stock index volatility is calculated in terms of moving-average standard deviation. Three important and interesting results are obtained. First, the other contracts investigated are affected by themselves only except for the two-period-lag stock index for one-month maturity put contracts against the index put premium. Second, there exist the one-way leading (two-way feedback) relationships between only one-month maturity (two-month maturity) index put premium and the index volatility, while the stock index Granger causes the index options premium. Finally, apart from the fact that impulse responses for the two variables from their own shocks are immensely large, impulse responses of its premium on options to the stock index are significantly persistent, but those of the stock index and its volatility to the index options premium are rather nil. Our suggestion on investment decisions is that, domestic investors can observe the distribution of volumes on options market to forecast the bullish or bearish pattern and its reversion point in the coming spot stock market, and thus make the speculative spreads between bid and ask prices on call and put contracts.