Empirical test of the efficiency of the UK covered warrants market: Stochastic dominance and likelihood ratio test approach

Chia-Ying Chan, Christian de Peretti, Zhuo Qiao and Wing-Keung Wong

Journal of Empirical Finance, 2012, vol. 19, issue 1, 162-174

Abstract: This paper represents the first attempt to apply a stochastic dominance (SD) approach to examine the efficiency of the UK covered warrants market. Our empirical analyses reveal that neither covered warrants nor their underlying shares stochastically dominate the other, indicating the nonexistence of potential arbitrage gains in either wealth or utility, which implies market efficiency. To complement the SD results, we also employ a likelihood ratio (LR) test to examine information efficiency. A bootstrap methodology is developed to correct the size distortion of the LR test. Our findings show that UK covered warrant returns efficiently reflect the return information of the underlying shares.

Keywords: Covered warrants; Market efficiency; Stochastic dominance; Bootstrap likelihood test (search for similar items in EconPapers)
JEL-codes: C14 G11 G14 G15 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (59)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:19:y:2012:i:1:p:162-174

DOI: 10.1016/j.jempfin.2011.09.001

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