In this paper, we investigate alternative one-factor and two-factor continuous-time models with both affine and non-affine variance dynamics for the Chinese options market. Through extensive empirical analysis of the option panel fit and diagnostics, we find that it is necessary to include both the non-affine feature and the multi-factor structure. For performance evaluation, we examine various measures from both aggregate and dynamic perspectives. Our results are statistically significant.

This paper will partially solve the puzzle of implied volatility spreads from the perspective of short-selling (option-implied borrowing rate). Specifically, we use Chinese SSE 50 ETF options data to examine the relationship between the option-implied volatility spreads and option-implied borrow rate. Using nonparametric regression models, we find that there is a clear negative correlation between the implied volatility spreads and the implied borrowing rate. Furthermore, our results show that there is a significant nonlinearity between these two variables. Finally, it is interesting to note that the option volatility spreads are zero when the option prices include the short selling cost.