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The Chinese Warrants Bubble

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  • Wei Xiong
  • Jialin Yu

Abstract

In 2005-08, over a dozen put warrants traded in China went so deep out of the money that they were certain to expire worthless. Nonetheless, each warrant was traded nearly three times each day at substantially inflated prices. This bubble is unique, because the underlying stock prices make the zero warrant fundamentals publicly observable. We find evidence supporting the resale option theory of bubbles: investors overpay for a warrant hoping to resell it at an even higher price to a greater fool. Our study confirms key findings of the experimental bubble literature and provides useful implications for market development.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15481.

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Date of creation: Nov 2009
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Publication status: published as Wei Xiong & Jialin Yu, 2011. "The Chinese Warrants Bubble," American Economic Review, American Economic Association, vol. 101(6), pages 2723-53, October.
Handle: RePEc:nbr:nberwo:15481

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Cited by:
  1. Chang, Eric C. & Luo, Xingguo & Shi, Lei & Zhang, Jin E., 2013. "Is warrant really a derivative? Evidence from the Chinese warrant market," Journal of Financial Markets, Elsevier, Elsevier, vol. 16(1), pages 165-193.
  2. Goh, Jeremy C. & Jiang, Fuwei & Tu, Jun & Wang, Yuchen, 2013. "Can US economic variables predict the Chinese stock market?," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 22(C), pages 69-87.
  3. Cheung, Stephen L. & Hedegaard, Morten & Palan, Stefan, 2012. "To See Is To Believe: Common Expectations in Experimental Asset Markets," IZA Discussion Papers 6922, Institute for the Study of Labor (IZA).
  4. Xiao, Wei-Lin & Zhang, Wei-Guo & Zhang, Xili & Zhang, Xiaoli, 2012. "Pricing model for equity warrants in a mixed fractional Brownian environment and its algorithm," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 391(24), pages 6418-6431.
  5. Pan, Li & Tang, Ya & Xu, Jianguo, 2013. "Weekly momentum by return interval ranking," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 21(1), pages 1191-1208.
  6. Baik, Bok & Kang, Hyoung-Goo & Kim, Young Jun, 2013. "Volatility arbitrage around earnings announcements: Evidence from the Korean equity linked warrants market," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 23(C), pages 109-130.
  7. Xiao, Wei-Lin & Zhang, Wei-Guo & Yao, Zheng & Wang, Xiao-Hui, 2013. "The impact of issuing warrant and debt on behavior of the firm's stock," Economic Modelling, Elsevier, Elsevier, vol. 31(C), pages 635-641.
  8. Markus K. Brunnermeier & Martin Oehmke, 2012. "Bubbles, Financial Crises, and Systemic Risk," NBER Working Papers 18398, National Bureau of Economic Research, Inc.
  9. Jennie Bai & Michael Fleming & Casidhe Horan, 2013. "The microstructure of China's government bond market," Staff Reports, Federal Reserve Bank of New York 622, Federal Reserve Bank of New York.
  10. Qiaoyang Zheng, 2011. "The Liar equilibrium in naked sovereign CDS trading : a financial economic approach," Post-Print, HAL dumas-00651782, HAL.
  11. Wei Xiong, 2013. "Bubbles, Crises, and Heterogeneous Beliefs," NBER Working Papers 18905, National Bureau of Economic Research, Inc.
  12. James J. Choi & Li Jin & Hongjun Yan, 2013. "Informed Trading and Expected Returns," NBER Working Papers 18680, National Bureau of Economic Research, Inc.
  13. Carl Chen & Peter Lung & F. Wang, 2013. "Where are the sources of stock market mispricing and excess volatility?," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 41(4), pages 631-650, November.

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