Do leveraged warrants prompt individuals to speculate on stock price reversals?

Miklos Farkas and Kata Váradi

Journal of Empirical Finance, 2021, vol. 63, issue C, 164-176

Abstract: Using proprietary data on bank-issued knock-out warrants written on a stock index, we find that individual investors’ aggregate warrant portfolio speculates against the short-term trend of the index. We argue that contrarian trading is driven by the interaction of product design and investors’ preference for large leveraged positions. Investors tend to open larger positions whenever warrants offer higher leverage. As a result, investors open an aggregate long position when calls offer higher leverage than puts. Since knock-out leverages move systematically with the underlying, aggregate warrant positions become contrarian even if investors do not intend to speculate on reversals.

Keywords: Financial innovation; Individual investor behavior; Retail structured products; Leverage warrants (search for similar items in EconPapers)
JEL-codes: G11 G21 G23 G41 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:63:y:2021:i:c:p:164-176

DOI: 10.1016/j.jempfin.2021.07.001

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