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Does Warrant Trading Matter in Tracking Errors of China-Focused Exchange-Traded Funds?

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  • Wai-Cheong Shum
  • Andy C. N. Kan
  • Tao Chen

Abstract

This article examines the impact of warrant trading on tracking errors in China-focused exchange-traded funds (ETFs) listed in Hong Kong. We followed Shin and Soydemir (2010) in adopting average absolute differences, standard errors from regression analysis, and standard deviation of return differences to measure the tracking errors before and after first-time warrant issuance. Our results indicate that tracking errors in China-focused ETFs are amplified after first-time warrant listing, implying that derivative products encourage speculative investment in the underlying assets. We used control-sample ETFs to verify further that our results were not driven by differences between the underlying assets.

Suggested Citation

  • Wai-Cheong Shum & Andy C. N. Kan & Tao Chen, 2014. "Does Warrant Trading Matter in Tracking Errors of China-Focused Exchange-Traded Funds?," Chinese Economy, Taylor & Francis Journals, vol. 47(1), pages 53-66, January.
    • Handle: RePEc:mes:chinec:v:47:y:2014:i:1:p:53-66
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