The Chinese Warrant Bubble: A Fundamental Analysis

39 Pages Posted: 11 Aug 2016

See all articles by Yintian Wang

Yintian Wang

Tsinghua University

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

Yingzi Zhu

Tsinghua University - School of Economics & Management

Date Written: August 8, 2016

Abstract

Based on a rational option pricing framework that incorporates short-selling and margin-trading constraints in the stock market, we present evidence that Chinese warrant prices, which are regarded as bubbles in the previous literature, can be explained by a new option pricing model. Based on the new model, we develop a warrant-price deviation measure to quantify unobserved demand for short-selling or margin trading due to market constraints. We empirically show that warrant-price deviation is driven mainly by underlying stock valuation. We conclude that the Chinese warrant market is better characterized by derivatives rather than a pure bubble detached from underlying assets.

Keywords: Warrant bubble, short-selling and margin constraints, put-call parity

JEL Classification: G12

Suggested Citation

Wang, Yintian and Zhou, Guofu and Zhu, Yingzi, The Chinese Warrant Bubble: A Fundamental Analysis (August 8, 2016). Available at SSRN: https://ssrn.com/abstract=2820416 or http://dx.doi.org/10.2139/ssrn.2820416

Yintian Wang (Contact Author)

Tsinghua University ( email )

Beijing, 100084
China

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

Yingzi Zhu

Tsinghua University - School of Economics & Management ( email )

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

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