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The Chinese Warrants Bubble

  • Wei Xiong
  • Jialin Yu

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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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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