Volatility discovery and volatility quoting on markets for options and warrants

Abstract

In several countries, classical options markets coexist with markets for bank-issued options (warrants) that are sold to retail investors. An interesting question in such cases is whether these bank-issued options merely reflect the options market information about future volatility or whether they themselves contribute to volatility discovery. We find that the options market is the informational leader in terms of volatility discovery, but the aggregate warrants market also makes significant contributions to volatility discovery. Looking at the intra-day volatility quoting behavior, warrant issuers tend to increase their quotes relative to the options markets. K E Y W O R D Sbank-issued warrants, information share, options, retail investors, VDAX-NEW, volatility discovery

Feedback Trading: The Intraday Case of Retail Derivatives

“…We demonstrate that investors' losses are primarily due to the bid-ask spread and not to strategic market-making in response to order flow. This is noteworthy, as existing studies show that issuers do exploit order flow patterns in other situations (Baule 2011;Baule, Frijns, and Tieves 2018;Pelster and Schertler 2019).…”

“…These prices do not necessarily reflect the fair value but rather the issuers' price-setting policy, which usually includes a dynamic mark-up (e.g., Stoimenov and Wilkens 2005;Baule 2011;Henderson and Pearson 2011). There is evidence that market makers anticipate and exploit specific order flow patterns by increasing their prices when they expect an excess in net investor demand and decreasing them when they expect an excess in net investor supply (Baule 2011;Baule, Frijns, and Tieves 2018). Despite the intensive trading activity in the overall market, trade in a single warrant occurs rarely.…”

Why are the prices of European‐style derivatives greater than the prices of American‐style derivatives?

“…The coefficient of volatility σ is significantly negative, which shows that the price of options is more sensitive to volatility changes. The German options market plays a leading role in volatility discovery compared with the German warrants market; in a way, this explains the difference in volatility sensitivity (Baule, 2018). DP ˆis significant with the expected negative sign, which means that the differences in exercise style explain the price differences.…”

“…In the Korean derivative warrant market, Chae et al (2013) find that liquidity providers only provide limited liquidity and earn profits through information advantages. In Germany, Baule et al (2018) find that warrant liquidity providers are inclined to increase their quotes compared with providers in the options markets to generate additional profits. Similarly, SFC (2005) finds that market makers in Hong Kong's derivative warrants market actively provide liquidity, which contributes to the 73% trading volume.…”

Volatility discovery in cryptocurrency markets

“…Analyzing the structure of volatility dynamics, in contrast, is a more recent topic, and we are, to the best of our knowledge, the first study which considers volatility discovery in cryptocurrency markets. Existing studies so far have considered stock volatility on different exchanges (Dias et al, 2018), stock and options volatility (Baule et al, 2018;Wang, 2014), or the volatility of options and credit default swaps (Forte and Lovreta, 2019). In terms of cryptocurrencies, there are studies which consider the interrelatedness of volatility across different currencies (Chaim and Laurini, 2019;Katsiampa, 2019), but not of the same currency across different exchanges.…”