Do retail option traders know better about market volatility?

This paper examines the informational content and predictive power of implied volatility over different forecasting horizons in a sample of European covered warrants traded in the Hong Kong and Singapore markets. The empirical results show that time-series-based volatility forecasts outperform implied volatility forecast as predictors of future volatility. The finding also suggests that implied volatility is biased and informationally inefficient and that covered warrants are typically overvalued. The results are attributable to the fact that, in Hong Kong and Singapore, the covered warrants markets are dominated by retail investors who tend to use covered warrants' leverage to speculate on the price movements of the underlying assets rather than to express their view on volatility. Arbitrage is not possible in the markets as short-selling of covered warrants is prohibited.

Investor heterogeneity and the cross-sectional stock returns in China

We examine the relationship between divergence of opinion and the cross-sectional stock returns in Chinese A share market where short-selling of stocks is prohibited by law. Using a proxy for divergence of opinion among the entire investor base, we document a positive relationship between divergent beliefs and future stock returns. This is in sharp contrast to Miller's (1977) prediction of a negative relationship between the two. The result is likely to be driven by the dominance of individual investors and their speculative trading behaviors in China. Miller's prediction is confirmed when divergence of opinion is measured using data on mutual fund holdings. Our results are robust to a number of common return predictors. We also find a significantly negative relationship between the fraction of tradable shares in listed Chinese companies and future stock returns. Increase in the fraction of tradable shares tends to reduce the predictability of stock returns using divergence of opinion.

The legal structure and regulation of securities lending (Pt 1)

Securities lending is the temporary transfer of securities(mainly shares) from one party to another. At theconclusion of the loan, the borrower is required to deliverequivalent securities to the lender. Securities lending isan important and growing part of global market activity.While it is said to perform valid and useful functions suchas increasing market liquidity, many—particularly duringthe global financial crisis—have expressed concerns thatit also leads to market instability. Concerns with securitieslending have focused primarily on its role in facilitatingshort selling. During the global financial crisis, marketsand regulators were concerned about the potentialdestabilising effect of short selling on financial markets.1Regulators across the globe took action to ban naked andcovered short selling.This article undertakes a comprehensive examinationof the legal structure of securities loans in Australia. Itexamines securities lending in Australia and other majorfinancial markets, namely Europe, the United Kingdomand United States. This article examines the Australian and international industry standard form contracts. It alsoconsiders the current regulatory environment for securitieslending in Australia.

The legal structure and regulation of securities lending (Pt 2)

connection with the collapse of Opes Prime in Australiaand the Australian Federal Court decision whichconsidered the legal characterisation of securities loans.The Opes Prime collapse provoked huge controversyregarding the role of securities lending and the ensuingcourt decision was the first judicial examination ofsecurities lending in Australia.1 The article also considersthe regulatory responses to securities lending and shortselling taken by the International Organisation ofSecurities Commissions (IOSCO) and in Australia, theUnited Kingdom, Europe and the United States duringthe global financial crisis.

The legal structure and regulation of securities lending

This paper examines the legal structure of securities lending in Australia, and also Europe, the United Kingdom and United States. It provides an analysis of the widely used industry documents, the Australian Master Securities Lending Agreement and the Global Master Securities Lending Agreement (GMSLA). It outlines the regulation of securities lending and short selling, including restrictions on short selling and the applicable disclosure requirements. It discusses the collapse of Opes Prime and the key Federal Court decision which considered the legal effect of the AMSLA. It also outlines the regulatory responses to securities lending and short selling taken by IOSCO, in Europe, the United States and the United Kingdom during the global financial crisis.