The Chinese Warrants Bubble

50 Pages Posted: 17 Mar 2009 Last revised: 6 Sep 2011

See all articles by Wei Xiong

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jialin Yu

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: October 8, 2010

Abstract

In 2005-08, over a dozen put warrants traded in China went so deep out of the money that they were almost certain to expire worthless. Nonetheless, each warrant was traded more than three time each day at substantially inflated prices. This bubble is unique in that the underlying stock prices make warrant fundamentals publicly observable and that warrants have predetermined finite maturities. This sample allows us to examine a set of bubble theories. In particular, our analysis highlights the joint effects of short-sales constraints and heterogeneous beliefs in driving bubbles, and confirms several key findings of the experimental bubble literature.

Suggested Citation

Xiong, Wei and Yu, Jialin, The Chinese Warrants Bubble (October 8, 2010). AFA 2011 Denver Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1361220 or http://dx.doi.org/10.2139/ssrn.1361220

Wei Xiong

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jialin Yu (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

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