The impact of derivatives hedging on the stock market: Evidence from Taiwan’s covered warrants market |
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| Institution: | 1. Antai College of Economics and Management, Shanghai Jiaotong University, Shanghai, PR China;2. Glorious Sun School of Business and Management, Donghua University, Shanghai, PR China;3. Carl H. Lindner College of Business, University of Cincinnati, Cincinnati, OH, USA;4. The University of Sydney Business School, The University of Sydney, Sydney, NSW, Australia;1. Moore School of Business, University of South Carolina, 1705 College St., Columbia, SC 29208, USA;2. Hanqing Advanced Institute of Economics and Finance, Renmin University of China, Beijing 100872, China |
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| Abstract: | We examine the impact of derivatives hedging on the spot market using accurate hedge ratios of covered warrants traded in the Taiwan Stock Exchange (TWSE). Results present significant positive abnormal returns and trading volumes before the announcement of a warrant’s issuance, and the effect is stronger when the hedging demand is larger. Moreover, a significantly positive relationship exists between stock return volatility and the price elasticity of hedging demand. Finally, we observe a significantly negative price effect upon the underlying stock after a call warrant has expired in-the-money due to the liquidation of hedging portfolios. |
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| Keywords: | Hedging impact Introduction effect Expiration effect Covered warrants Return volatility Trading volume Price elasticity |
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