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Exercise to Lose Money? Irrational Exercise Behavior from the Chinese Warrants Market

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  • Li Liao
  • Zhisheng Li
  • Weiqiang Zhang
  • Ning Zhu

Abstract

Using a market‐level exercise data set and an individual‐level trading data set between August 2006 and June 2009, this study examines the incidence of two types of irrational exercise behavior in the Chinese warrants market. We find that 121.64 million shares of warrants (0.64% of all warrants) were either exercised with an immediate loss or failed to be exercised, resulting in foregone risk‐free profits. These irrational exercises caused warrant holders to lose over 717.79 million Yuan. Some of the irrational behavior can be attributed to “entertainment seeking” and the “T + 1” rule practiced in the Chinese security market, but the majority is attributed to warrant holders' ignorance and/or negligence of warrant mechanics. Our findings provide additional field evidence of clearly irrational exercise behavior in a derivatives market. We also find that investor education, information and guidance provision can mitigate the incidence of irrational exercise behavior significantly. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:399–419, 2014

Suggested Citation

  • Li Liao & Zhisheng Li & Weiqiang Zhang & Ning Zhu, 2014. "Exercise to Lose Money? Irrational Exercise Behavior from the Chinese Warrants Market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 34(5), pages 399-419, May.
    • Handle: RePEc:wly:jfutmk:v:34:y:2014:i:5:p:399-419
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    Cited by:

    1. Eickholt, Mathias, 2014. "Behavioral financial engineering in the fixed-income market: The influence of the coupon structure," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe 16, University of Passau, Faculty of Business and Economics.
    2. Hui Ying Sng & Yang Zhang & Huanhuan Zheng, 2020. "Margin trade, short sales and financial stability," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(3), pages 673-702, July.
    3. Wong, W.-K. & Lean, H.H. & McAleer, M.J. & Tsai, F.-T., 2018. "Why did Warrant Markets Close in China but not Taiwan?," Econometric Institute Research Papers EI2018-22, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    4. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.
    5. Eickholt, Mathias & Entrop, Oliver & Wilkens, Marco, 2014. "Individual investors and suboptimal early exercises in the fixed-income market," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe 14, University of Passau, Faculty of Business and Economics.
    6. Wing-Keung Wong & Hooi Hooi Lean & Michael McAleer & Feng-Tse Tsai, 2018. "Why Are Warrant Markets Sustained in Taiwan but Not in China?," Sustainability, MDPI, vol. 10(10), pages 1-17, October.
    7. Yu Liang & Weiqiang Zhang, 2016. "Do Investors Buy Lotteries in China’s Stock Market?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 6(5), pages 1-5.
    8. Eickholt, Mathias & Entrop, Oliver & Wilkens, Marco, 2014. "What makes individual investors exercise early? Empirical evidence from the fixed-income market," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe 15, University of Passau, Faculty of Business and Economics.
    9. Xindan Li & Avanidhar Subrahmanyam & Xuewei Yang & Wei Jiang, 0. "Winners, Losers, and Regulators in a Derivatives Market Bubble," Review of Economic Studies, Oxford University Press, vol. 34(1), pages 313-350.
    10. Eickholt, Mathias & Entrop, Oliver & Wilkens, Marco, 2018. "What makes individual investors exercise early? Empirical evidence from non-tradable fixed-income products," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 318-334.

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