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The Chinese Warrants Bubble

Author

Listed:
  • Wei Xiong

    (Princeton University)

  • Jialin Yu

    (Columbia University)

Abstract

In 2005-2008, over a dozen put warrants traded in China went so deep out of the money that they were almost certain to expire worthless. Nonetheless, each warrant was traded more than three times each day at substantially inflated prices. This bubble is unique in that the underlying stock prices make warrant fundamentals publicly observable and that warrants have predetermined finite maturities. This sample allows us to examine a set of bubble theories. In particular, our analysis highlights the joint effects of short-sales constraints and heterogeneous beliefs in driving bubbles and confirms several key findings of the experimental bubble literature.

Suggested Citation

  • Wei Xiong & Jialin Yu, 2011. "The Chinese Warrants Bubble," Working Papers 1398, Princeton University, Department of Economics, Econometric Research Program..
    • Handle: RePEc:pri:metric:wp038_xiong_yu.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    financial bubbles; warrents; China; stock market;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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