Do Chinese Retail Option Traders Know Anything about Market Volatility?

Abstract

This paper examines the information content of implied volatility in the Chinese covered warrant market and finds that the implied volatility is consistently higher than the realized volatility for all warrants and across all maturities. The implied volatility has very little information content for future volatility in the Chinese warrant market which is dominated by retail investors. Possible explanations for the results are regulatory issues such as restrictions on the short-selling of warrants, differential trading rules for stocks and warrants, high leverage and low trading costs and a market dominated by retail investors.

Keywords

covered warrants / equity warrants / implied volatility / option trading

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2014 Higher Education Press and Brill