Are Investors Irrational? - Study on China Warrant Market

24 Pages Posted: 21 Jan 2013  

Yintian Wang

Tsinghua University

Yingzi Zhu

Tsinghua University - School of Economics & Management

Date Written: December 6, 2012

Abstract

This paper studies Chinese warrant price deviation. By observing “asymmetric price error” phenomena, we propose that the rational hedging and speculation motivation is one important cause for warrant price deviations. Investors do not speculate irrationally under the resale motivation all the time, neither do they ignore warrants’ hedging function. Instead, investors would trade for hedging and speculation purpose and drive the warrant prices when the underlying assets are significantly undervalued or overvalued. The paper applies a model-free measure for warrant price deviation and verifies the proposal by studying five couples of warrants from 2006 to the beginning of 2008. It has been found that the rational hedging and speculation motivation dominates other trading motivation in the market.

Keywords: Warrant bubble, hedging motivation, rational speculation, put-call parity

JEL Classification: G1, G32

Suggested Citation

Wang, Yintian and Zhu, Yingzi, Are Investors Irrational? - Study on China Warrant Market (December 6, 2012). Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: https://ssrn.com/abstract=2204112 or http://dx.doi.org/10.2139/ssrn.2204112

Yintian Wang (Contact Author)

Tsinghua University ( email )

Beijing, 100084
China

Yingzi Zhu

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62786041 (Phone)

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