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Is warrant really a derivative? Evidence from the Chinese warrant market

Author

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  • Chang, Eric C.
  • Luo, Xingguo
  • Shi, Lei
  • Zhang, Jin E.

Abstract

This paper studies the Chinese warrant market that has been developing since August 2005. Empirical evidence shows that the market prices of warrants are much higher systematically than the Black-Scholes prices with historical volatility. The prices of a warrant and its underlying asset do not support the monotonicity, perfect correlation and option redundancy properties. The cumulated delta-hedged gains for almost all expired warrants are negative. The negative gains are mainly driven by the volatility risk, and the trading values of the warrants for puts and the market risk for calls. The investors are trading some other risks in addition to the underlying risks.

Suggested Citation

  • 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, vol. 16(1), pages 165-193.
  • Handle: RePEc:eee:finmar:v:16:y:2013:i:1:p:165-193
    DOI: 10.1016/j.finmar.2012.04.003
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    References listed on IDEAS

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    Cited by:

    1. Siriopoulos, Costas, 2015. "An Analysis of the Covered Warrants listed on the Athens Exchange," MPRA Paper 64636, University Library of Munich, Germany.
    2. Xiao, Weilin & Zhang, Xili, 2016. "Pricing equity warrants with a promised lowest price in Merton’s jump–diffusion model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 219-238.

    More about this item

    Keywords

    Warrants; The Chinese warrant market; Option pricing model;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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