Is warrant really a derivative? Evidence from the Chinese warrant market |
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| Authors: | Eric C Chang Xingguo Luo Lei Shi Jin E Zhang |
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| Institution: | 1. Faculty of Business and Economics, The University of Hong Kong, Pokfulam Road, Hong Kong;2. Academy of Financial Research and College of Economics, Zhejiang University, Hangzhou, PR China;3. School of Economics and Finance, The University of Hong Kong, Pokfulam Road, Hong Kong;4. HSBC School of Business, Peking University, University Town, Shen Zhen, PR China;5. Department of Accountancy and Finance, School of Business, University of Otago, Dunedin 9054, New Zealand |
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| Abstract: | This paper studies the Chinese warrant market that has been developing since August 2005. Empirical evidence shows that the market prices of warrants are much higher systematically than the Black-Scholes prices with historical volatility. The prices of a warrant and its underlying asset do not support the monotonicity, perfect correlation and option redundancy properties. The cumulated delta-hedged gains for almost all expired warrants are negative. The negative gains are mainly driven by the volatility risk, and the trading values of the warrants for puts and the market risk for calls. The investors are trading some other risks in addition to the underlying risks. |
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