The Chinese Warrants Bubble

American Economic Review, Vol. 101, pp. 2723-2753, October 2011

Economic Theory Center Working Paper No. 38-2012

32 Pages Posted: 27 Oct 2011

See all articles by Jialin Yu

Jialin Yu

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

Wei Xiong

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

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Date Written: 2011

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

Yu, Jialin and Xiong, Wei, The Chinese Warrants Bubble (2011). American Economic Review, Vol. 101, pp. 2723-2753, October 2011 , Economic Theory Center Working Paper No. 38-2012, Available at SSRN: https://ssrn.com/abstract=1949418

Jialin Yu (Contact Author)

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

Clear Water Bay, Kowloon
Hong Kong

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

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