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Winners, Losers, and Regulators in a Derivatives Market Bubble
[Bubbles and crashes]

Author

Listed:
  • Xindan Li
  • Avanidhar Subrahmanyam
  • Xuewei Yang

Abstract

We use proprietary brokerage data to study trading patterns within a well-known financial market bubble: the Chinese warrants bubble. Persistently successful investors trade very actively and exhibit characteristics of de facto market makers. Unskilled investors unprofitably trend-chase and increase holdings in out-of-the-money warrants near expiration, whereas sophisticated investors do the reverse. We find that regulators did not properly forecast trading frenzies, as the prespecified price limits often exclude the fundamental values of warrants.

Suggested Citation

  • Xindan Li & Avanidhar Subrahmanyam & Xuewei Yang, 2021. "Winners, Losers, and Regulators in a Derivatives Market Bubble [Bubbles and crashes]," The Review of Financial Studies, Society for Financial Studies, vol. 34(1), pages 313-350.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:1:p:313-350.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa058
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    Citations

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    Cited by:

    1. An, Li & Lou, Dong & Shi, Donghui, 2022. "Wealth redistribution in bubbles and crashes," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 134-153.
    2. Andy C W Chui & Avanidhar Subrahmanyam & Sheridan Titman, 2022. "Momentum, Reversals, and Investor Clientele [Illiquidity and stock returns: Cross-section and time-series effects]," Review of Finance, European Finance Association, vol. 26(2), pages 217-255.
    3. Liao, Jingchi & Peng, Cameron & Zhu, Ning, 2022. "Extrapolative bubbles and trading volume," LSE Research Online Documents on Economics 110514, London School of Economics and Political Science, LSE Library.
    4. Liao, Jingchi & Peng, Cameron & Zhu, Ning, 2021. "Extrapolative bubbles and trading volume," LSE Research Online Documents on Economics 118887, London School of Economics and Political Science, LSE Library.
    5. Ülkü, Numan & Ali, Fahad & Saydumarov, Saidgozi & İkizlerli, Deniz, 2023. "COVID caused a negative bubble. Who profited? Who lost? How stock markets changed?," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    6. An, Li & Lou, Dong & Shi, Donghui, 2022. "Wealth redistribution in bubbles and crashes," LSE Research Online Documents on Economics 113766, London School of Economics and Political Science, LSE Library.

    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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