Asymmetric Transaction Costs And Its Influence On The Chinese SH50ETF Option Market

We begin our research from the deviation of the European put-call-parity relation in the Chinese SH50 ETF option market.We find that in most of the time,put option seems to be too valuable compared to the call,making it seems to be quite profitable to arbitrage this relation.But when we take the translation costs,especially the short selling restrictions equivalent transaction costs into account,most of these arbitrage opportunities will disappear.Then we developed an option pricing model with asymmetric fractional transaction costs based on Leland(1985),we considered 3 kinds of transaction costs,the buying cost,the ordinary selling cost,and the short selling cost.In a market where the short selling cost is higher than the ordinary selling cost,option pricing will blur around the frictionless market pricing,while the put option pricing will tend to be higher and the call pricing tends to be lower.We also find such relations exist on the SH50 ETF option market through empirical analysis.Also with this model,we measured the short selling cost as a multiple of ordinary selling cost.It was very big in the year 2016 being about4.3-7.6 times and very small in 2018 being only about 10% higher.This is also confirmed by the degree of pricing deviation between the call and the put options in each year.Then we explored the hedging effectiveness of the options under asymmetric transaction costs condition.Monte Carlo Simulation tells us that under high short selling costs,the dynamic hedging effectiveness will be much lower.Also,we tested a few static hedging strategies with the SH50 ETF option data and got the conclusion that SH50 ETF option market's hedging effectiveness is so low that the utility gain through adding options to the portfolio is much smaller than expected.Other than that,we also developed a method to adapt the asymmetric transaction cost condition and calculate the VIX with SH50 ETF option prices.The raw VIX and the adjusted VIX both provide good predictability of future volatility compared to the traditional volatility prediction models.