Information efficiency of Swedish warrants- : Empirical tests of warrants quoted on the Swedish plain vanilla market

Abstract: Due to the sharpen regulation of the Swedish plain vanilla warrant in 2006 and the recent increase in trade among private investors, this thesis examined the informa-tion efficiency of Swedish plain vanilla warrants. This was done in three different ways. First the theoretical Black & Scholes (B&S) price was tested against the ac-tual market price. Secondly likelihood ratio test statistics was used to see whether information regarding past returns added any information to that already captured by the implied volatility (IV) generated from observed warrant market prices via the B&S model. The third method used was a comparison of the IV´s among com-parable warrants. As the regulation of the Swedish plain vanilla warrant market states that only certified issuer are allowed short calls and puts, the self adjusting price mechanism found in the option market doesn’t exist on this market. As a con-sequence of this, investors on this market is reliant of accurate ask and bid prices from the issuers. Further, the information efficiency of a capital market is of es-sence for capital allocation, price discovery and risk management. The results from all three tests rejected the information efficiency hypothesis of the sample. Thus concluding that the included warrants in this thesis are none ideally for activities such as capital allocation, price discovery and risk management.