Volatility in covered warrants - A comparison between EGARCH-forecasted volatility and implied volatility on the Swedish warrant market -

Abstract: "The aim of this thesis is to study the implied volatility on certain warrants on the Nordic Derivatives Exchange and compare it to an EGARCH-forecasted volatility (which throughout the thesis is used as proxy for the true volatility by the authors) in order to see if the difference follows a specific pattern." The difference between the forecasted volatility and the implied volatility fluctuates across moneyness and the lifetime of the warrant. A number of patterns are detected across the two parameters, which in turn might be caused by the market maker’s behavior towards market uncertainties. In addition to this, a “ratio-smile” trend over time was detected on several warrants. That is, the ratio (implied volatility over forecasted volatility) is higher at the beginning and the end of the lifetime of the warrant compared to the middle of the lifetime (which coincided with an increase in moneyness).