Do put warrants unwind short‐sale restrictions? Further evidence from the Taiwan Stock Exchange

Yi‐Wei Chuang, Wei-Che Tsai, Pei‐Shih Weng and Chi Yin

Journal of Futures Markets, 2021, vol. 41, issue 3, 325-348

Abstract: This study investigates the relationship between stock short‐selling restrictions and bearish equity warrants on the Taiwan Stock Exchange to clarify the substitutive role of put warrants for underlying stocks subject to short‐sale constraints. We show that put warrant transactions increase when short selling is prohibited in the spot market and the substitutive increase in trading also leads to wider bid–ask spreads and higher implied volatility for put warrants. Moreover, we find that the increased trading activities in put warrants could subsequently affect spot market trading through warrant issuers' required dynamic hedging behaviors.

Date: 2021
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https://doi.org/10.1002/fut.22169

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