Winners, Losers, and Regulators in a Derivatives Market Bubble

Bubbles and crashes

Xindan Li, Avanidhar Subrahmanyam and Xuewei Yang

The Review of Financial Studies, 2021, vol. 34, issue 1, 313-350

Abstract: We use proprietary brokerage data to study trading patterns within a well-known financial market bubble: the Chinese warrants bubble. Persistently successful investors trade very actively and exhibit characteristics of de facto market makers. Unskilled investors unprofitably trend-chase and increase holdings in out-of-the-money warrants near expiration, whereas sophisticated investors do the reverse. We find that regulators did not properly forecast trading frenzies, as the prespecified price limits often exclude the fundamental values of warrants.

JEL-codes: D03 D81 G02 G12 G23 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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