Title: Do retail options traders know better about market volatility?
Authors: Cheny Chen, Ming-Hua Liu, Hoa Nguyen
Addresses: Faculty of Business, Auckland University of Technology, Private Bag 92006, Auckland 1020, New Zealand. ' Faculty of Business Administration, University of Macau, Av. Padre Tomas Pereira, Taipa, Macau, China. ' School of Accounting, Economics and Finance, Faculty of Business and Law, Deakin University, 221 Burwood Highway, Burwood VIC 3125, Australia
Abstract: This paper examines the informational content and predictive power of implied volatility over different forecasting horizons in a sample of European covered warrants traded in the Hong Kong and Singapore markets. The empirical results show that time-series-based volatility forecasts outperform implied volatility forecast as predictors of future volatility. The finding also suggests that implied volatility is biased and informationally inefficient and that covered warrants are typically overvalued. The results are attributable to the fact that, in Hong Kong and Singapore, the covered warrants markets are dominated by retail investors who tend to use covered warrants| leverage to speculate on the price movements of the underlying assets rather than to express their view on volatility. Arbitrage is not possible in the markets as short-selling of covered warrants is prohibited.
Keywords: covered warrants; equity warrants; implied volatility; options trading; market volatility; Hong Kong; Singapore; retail investors.
American Journal of Finance and Accounting, 2008 Vol.1 No.1, pp.1 - 19
Published online: 13 Aug 2008 *Full-text access for editors Access for subscribers Purchase this article Comment on this article