 Mispricing of Chinese warrantsEric Powers and Gang Xiao Pacific-Basin Finance Journal, 2014, vol. 30, issue C, 62-86 Abstract: From August 2005 to December 2008, a total of 54 warrants were issued in China. Trading in China's warrant market was extremely active — on a daily basis, turnover often exceeded one. Using three standard pricing models, we document that put warrant market prices averaged 1.2 yuan more than model-generated prices, while call warrant prices averaged 1.9 yuan less. Financial institutions that were authorized to create new warrants exploited these pricing anomalies and generated 20 billion yuan (over $3 billion) in creating overpriced put warrants. We identify two important factors that explain the mispricing. First, we show that the P/E ratios of underlying stocks are related to the overpricing of put warrants and the underpricing of call warrants. This suggests that investors took the potential burst of a stock market bubble into account and thus imposed an implicit discount on the value of stocks when pricing warrants. Second, investors were paying a premium on warrants to fulfill their speculation/trading purposes. Investors also switched from stock trading to warrant trading after an exogenous increase in a stock transaction tax. Keywords: Chinese warrants; Underpricing; Overpricing (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:30:y:2014:i:c:p:62-86 DOI: 10.1016/j.pacfin.2014.07.002 Access Statistics for this article Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee More articles in Pacific-Basin Finance Journal from Elsevier |
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