Winners, Losers, and Regulators in a Derivatives Market Bubble
The Review of Financial Studies, Forthcoming
78 Pages Posted: 7 Feb 2018 Last revised: 31 Mar 2020
Date Written: February 6, 2020
We use proprietary brokerage data to study trading patterns within a well-known financial market bubble: that in the Chinese warrants market. Persistently successful investors traded very actively and exhibited characteristics of de facto market makers. Unskilled investors unprofitably trend-chased and increased holdings in out-of-the-money warrants near expiration, whereas sophisticated investors did the reverse. Regulators did not properly forecast trading frenzies, as the pre-specified price limits often excluded warrants' fundamental values.
Keywords: Warrants; Smart/naive investors, Financial sophistication; Trading performance; Individuals/institutions; Lotteries
JEL Classification: D03, D81, G12, G13, G23
Suggested Citation: Suggested Citation