Location of Repository

The Chinese Warrants Bubble

By Wei Xiong and Jialin Yu

Abstract

In 2005-08, over a dozen put warrants traded in China went so deep out of the money that they were certain to expire worthless. Nonetheless, each warrant was traded nearly three times each day at substantially inflated prices. This bubble is unique, because the underlying stock prices make the zero warrant fundamentals publicly observable. We find evidence supporting the resale option theory of bubbles: investors overpay for a warrant hoping to resell it at an even higher price to a greater fool. Our study confirms key findings of the experimental bubble literature and provides useful implications for market development.

OAI identifier:

Suggested articles

Preview

Citations

  1. (1998). A model of investor sentiment,
  2. (1999). A unified theory of underreaction, momentum trading, and overreaction in asset markets,
  3. (1998). Are investors reluctant to realize their losses?,
  4. (2006). Asset float and speculative bubbles,
  5. (2005). Bubbles and experience: An experiment on speculation,
  6. (1988). Bubbles, crashes, and endogenous expectations in experimental spot asset markets,
  7. (2003). Can the market add and subtract? Mispricing in tech stock carve-outs,
  8. (2007). Disagreement and the stock market,
  9. (2003). Dotcom mania: The rise and fall of internet stock prices,
  10. (2000). Famous first bubbles: The fundamentals of early manias.
  11. (1993). Finite bubbles with short sale constraints and asymmetric information,
  12. (2001). for an interesting discussion of how the introduction of online trading technology to U.S. investors in the late 1990s fueled the Internet bubble.
  13. (1995). Futures contracting and dividend uncertainty in experimental asset markets,
  14. (2005). How often to sample a continuous-time process in the presence of market microstructure noise,
  15. (1988). Illusion of control: A meta-analytic review,
  16. (1998). Investor psychology and security market under- and overreactions,
  17. (2000). Irrational exuberance.
  18. (2008). Just how much do individual investors lose by trading?, Review of Financial Studies forthcoming.
  19. (2001). Learning to be overconfident,
  20. (2006). Margin, short selling, and lotteries in experimental asset markets,
  21. (2001). Non-speculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs. actual irrationality,
  22. (2007). Optimal beliefs, asset prices, and the preference for skewed returns,
  23. (2003). Overconfidence and speculative bubbles,
  24. (1990). Positive feedback investment strategies and destabilizing rational speculation,
  25. (2007). Price bubbles sans dividend anchors: Evidence from laboratory stock markets,
  26. (2005). Prospect theory, mental accounting, and momentum,
  27. (2008). Regulatory Commission,
  28. (1993). Returns to buying winners and selling losers - implications for stock-market efficiency,
  29. (1996). Speculative investor behavior and learning,
  30. (1978). Speculative investor behavior in a stock-market with heterogeneous expectations,
  31. (2005). Speculative trading and stock prices: Evidence from chinese a-b share premia,
  32. (2008). Stocks as lotteries: The implications of probability weighting for security prices,
  33. (2003). Stocks as money: Convenience yield and the tech-stock bubble, in
  34. (2008). Thar she blows: Can bubbles be rekindled with experienced subjects?
  35. (2006). The effect of short selling on bubbles and crashes in experimental spot asset markets,
  36. (1975). The illusion of control,
  37. (2001). The Internet and the investor,
  38. (2008). The mechanism of bubble: An empirical analysis, working paper,
  39. (2007). The nominal price puzzle, working
  40. (1997). The relative performance of five alternative warrant pricing models,
  41. (2007). Traders’ expectations in asset markets: experimental evidence,

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.