Empirical Test of the Efficiency of UK Covered Warrants Market: Stochastic Dominance and Likelihood Ratio Test Approach

Abstract

This paper first examines the efficiency of the UK covered warrants market by adopting a stochastic dominance (SD) approach to examine market efficiency. Our empirical analyses reveal that neither covered warrants nor the underlying shares stochastically dominate each other, which implies that the UK covered warrants market is efficient. To complement the SD results, the likelihood ratio (LR) test statistic is also employed to evaluate market efficiency, which also offers consistent results. The empirical evidence serves as a reference for market participants who are interested in covered warrants and also contributes to the growing body of academic knowledge on this new financial instrument.

Keywords: Stochastic dominance, Market efficiency, Covered warrants, Bootstrap

JEL Classification: C14, G11, G14, G15