This paper investigates the predictive power of the put-call-ratio (PCR) implied by China’s 50ETF option on the 50ETF return and its variance. By using simple partitional regressions, the relationship between the PCRs and 50ETF returns are tested. This study conducts tests and their robustness based on different horizons, market conditions, moneyness status and time to maturity. Empirical results indicate that the PCR is a strong forward-looking indicator of the variance of 50ETF return. A robust and negative correlation is detected. A significant linear correlation between the PCR and 50ETF return only exists during the market crash. This study shows evidence that the PCR as seen in common trading practices may be misused and indicates a potential way of using it.

【Keywords】

Gang Jianhua, Research Fellow of IMI, School of Finance, Renmin University of China

Zhao Yang, International College, Renmin University of China

Ma Xinchen, Hanqing Advanced Institute of Economics and Finance, Renmin University of China