The impact of derivatives hedging on the stock market: Evidence from Taiwan’s covered warrants market

San-Lin Chung, Wen-Rang Liu and Wei-Che Tsai

Journal of Banking & Finance, 2014, vol. 42, issue C, 123-133

Abstract: We examine the impact of derivatives hedging on the spot market using accurate hedge ratios of covered warrants traded in the Taiwan Stock Exchange (TWSE). Results present significant positive abnormal returns and trading volumes before the announcement of a warrant’s issuance, and the effect is stronger when the hedging demand is larger. Moreover, a significantly positive relationship exists between stock return volatility and the price elasticity of hedging demand. Finally, we observe a significantly negative price effect upon the underlying stock after a call warrant has expired in-the-money due to the liquidation of hedging portfolios.

Keywords: Hedging impact; Introduction effect; Expiration effect; Covered warrants; Return volatility; Trading volume; Price elasticity (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:42:y:2014:i:c:p:123-133

DOI: 10.1016/j.jbankfin.2014.01.027

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