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

See all articles by Xindan Li

Xindan Li

Nanjing University

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Xuewei Yang

Nanjing University - School of Management and Engineering

Date Written: February 6, 2020

Abstract

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

Li, Xindan and Subrahmanyam, Avanidhar and Yang, Xuewei, Winners, Losers, and Regulators in a Derivatives Market Bubble (February 6, 2020). The Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3115973 or http://dx.doi.org/10.2139/ssrn.3115973

Xindan Li

Nanjing University ( email )

Nanjing, Jiangsu 210093
China

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Xuewei Yang

Nanjing University - School of Management and Engineering ( email )

22 Hankou Road, Gulou District
Nanjing, Jiangsu 210093
China

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