The Chinese Warrants Bubble
American Economic Review, Vol. 101, pp. 2723-2753, October 2011
32 Pages Posted: 27 Oct 2011
Date Written: 2011
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.
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