Do leveraged warrants prompt individuals to speculate on stock price reversals? |
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Institution: | 1. The authors are from the Accounting and Finance Group, Alliance Manchester Business School, University of Manchester, Booth Street East, Manchester, M15 6PB, UK;2. Powertrain Finance Analyst, Ford Motors, Southend-on-Sea, UK |
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Abstract: | Using proprietary data on bank-issued knock-out warrants written on a stock index, we find that individual investors’ aggregate warrant portfolio speculates against the short-term trend of the index. We argue that contrarian trading is driven by the interaction of product design and investors’ preference for large leveraged positions. Investors tend to open larger positions whenever warrants offer higher leverage. As a result, investors open an aggregate long position when calls offer higher leverage than puts. Since knock-out leverages move systematically with the underlying, aggregate warrant positions become contrarian even if investors do not intend to speculate on reversals. |
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Keywords: | Financial innovation Individual investor behavior Retail structured products Leverage warrants |
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