The Information Content of Implied Volatility in the Hong Kong and Singapore Covered Warrants Markets

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 a predictor of future volatility. The finding also suggests that implied volatility is biased and informationally inefficient. The results are due to the fact 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 rather than to express their view on volatility.