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Implied volatility of structured warrants: Emerging market evidence

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  • Murad Samsudin, Najmi Ismail
  • Mohamad, Azhar
  • Sifat, Imtiaz Mohammad

Abstract

This paper examines the informational content of Implied Volatility (IV) for 493 Malaysian and 945 Thai structured call warrants from 2014 to 2015. Unlike a regular warrant (issued by the firm) and attached to bonds, loan stocks, or preferred stocks as sweeteners, a structured warrant is issued by a third party. Structured warrant is a prevalent exchange-traded instrument in South-East Asian countries. This study is among the first to examine the IV of structured warrants using emerging market datasets from Bursa Malaysia and the Stock Exchange of Thailand. Our predictive regression models compare IV's effectiveness in anticipating future realized volatility vis-à-vis historical volatility. We record that IV in both exchanges contains relevant information about future realized volatility only on a handful of occasions. Additionally, structured warrants' IV is a mostly biased predictor with a diminutive efficiency threshold. Our findings bear implications for the region's derivatives market growth and risk management practices.

Suggested Citation

  • Murad Samsudin, Najmi Ismail & Mohamad, Azhar & Sifat, Imtiaz Mohammad, 2021. "Implied volatility of structured warrants: Emerging market evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 464-479.
    • Handle: RePEc:eee:quaeco:v:80:y:2021:i:c:p:464-479
    DOI: 10.1016/j.qref.2021.03.016
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    More about this item

    Keywords

    Implied volatility; Structured warrants; Information content; Bursa Malaysia; Stock exchange of Thailand; Derivatives;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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