CALL WARRANTS IN CHINA'S SECURITIES MARKET: PRICING BIASES AND INVESTORS' CONFUSION

Wei Fan () and Xinyi Yuan ()
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Wei Fan: School of Management and Economics, UESTC, Chengdu, 610054, China;
Xinyi Yuan: Investment Bank, China Merchant Securities Co. Ltd., Shenzhen, 518000, China;

New Mathematics and Natural Computation (NMNC), 2011, vol. 07, issue 02, 333-345

Abstract: This paper examines the price performance of call warrants in China's securities market. A recent sample of daily call warrant prices observed during the period from August 2005 to March 2007 is used. To the best of our knowledge this is the only recent study to using data from China and as such it greatly enhances our understanding of this particular market. On average, we find that the observed market prices are irrationally higher than the Black-Scholes model prices by 80.38% (using 180-day historical volatility) and 140.50% (using EGARCH volatility). However, we find another anomalous phenomenon that some of the call warrants prices are not only lower than the model prices, but have also recently been anomalously under their lower bounds. This finding seems to violate the "no arbitrage" principle. Among the convincing reasons, our findings indicate that trading mechanism constraints in China's securities market prevent rational investors from driving the prices of these call warrants to a reasonable level. Arbitrage chances are found to exist in some specific cases when the call warrant prices are below their lower bounds.

Keywords: Call warrant; Black-Scholes model; EGARCH model; "under the lower bound" puzzle; arbitrage (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S1793005711001962

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