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The Impact of Warrant Introduction: The Australian Experience

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  • Michael Clarke

    (School of Accounting, Economics and Finance, Faculty of Business and Law, Deakin University, Victoria, 3125, Australia)

  • Gerard Gannon

    ()
    (School of Accounting, Economics and Finance, Faculty of Business and Law, Deakin University, Victoria, 3125, Australia)

  • Russell Vinning

    (School of Accounting, Economics and Finance, Faculty of Business and Law, Deakin University, Victoria, 3125, Australia)

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    Abstract

    The main purpose of this paper is to examine the impact that the introduction of exchange traded derivative warrants has on the underlying securities' price, volume and volatility in the Australian market. The impact that derivative trading has on the underlying security is essential to our understanding of security market behaviour and important in the fields of market efficiency and pricing of derivatives. The major findings of significant negative abnormal returns, reduction in skewness, no change in beta and small changes in variance are consistent with recent research findings in the US, UK and Hong Kong. However, the findings of derivative warrant listing resulting in decreased trading volume is in contrast with most prior research in the field. The results of this research, showing a negative price impact, decreased volume and no change in risk, and other recent empirical findings such as Mayhew and Mihov (2000) or Faff and Hillier (2003), indicate a requirement for further development of the theoretical frameworks.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

    Volume (Year): 14 (2011)
    Issue (Month): 02 ()
    Pages: 213-269

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    Handle: RePEc:wsi:rpbfmp:v:14:y:2011:i:02:p:213-269

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    Related research

    Keywords: Derivatives; warrants; market efficiency; event study;

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    References

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    1. Danielsen, Bartley R. & Sorescu, Sorin M., 2001. "Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 451-484, December.
    2. Leonardo Becchetti & Andrea Caggese, 2000. "Effects of index option introduction on stock index volatility: a procedure for empirical testing based on SSC-GARCH models," Applied Financial Economics, Taylor & Francis Journals, vol. 10(3), pages 323-341.
    3. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    4. Michael Aitken & Reuben Segara, 2005. "Impact of warrant introductions on the behaviour of underlying stocks: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(1), pages 127-144.
    5. Detemple, Jerome & Jorion, Philippe, 1990. "Option listing and stock returns : An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 781-801, October.
    6. Detemple, Jerome B & Selden, Larry, 1991. "A General Equilibrium Analysis of Option and Stock Market Interactions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 279-303, May.
    7. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    8. William Bertin & Paul Fowler & David Michayluk & Laurie Prather, 2010. "An analysis of Australian exchange traded options and warrants," Journal of Economics and Finance, Springer, vol. 34(2), pages 150-172, April.
    9. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    10. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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