Predictive Power of Implied Volatility of Structured Warrants: Evidence from Singapore

Abstract

This paper examines the information content of implied volatility of structured call warrant in the Singapore Stock Exchange (SGX). The study is the first to examine implied volatility of equity options (structured warrants) outside the US. Using a daily dataset for 252 trading days for a period between August 1, 2014 and July 31, 2015, we test whether implied volatility is an unbiased estimate of realized volatility. In other words, whether implied volatility contains information on future realized volatility, and scrutinize the efficiency of implied volatility and its predictive power compared to historical volatility. Our findings suggest that although implied volatility does contain some relevant information about future volatility, it remains a biased forecast of realized volatility; the efficiency of implied volatility is trivial, and its predictive power is not superior to historical volatility. Our results broadly accord with that of Lamareux and Lastrapes (1993), Day and Lewis (1992), C Canina and Figlewski (1993) and JORION (1995).