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The Chinese Warrants Bubble

Author

Listed:
  • Wei Xiong
  • Jialin Yu

Abstract

In 2005-2008, over a dozen put warrants traded in China went so deep out of the money that they were almost certain to expire worthless. Nonetheless, each warrant was traded more than three times each day at substantially inflated prices. This bubble is unique in that the underlying stock prices make warrant fundamentals publicly observable and that warrants have predetermined finite maturities. This sample allows us to examine a set of bubble theories. In particular, our analysis highlights the joint effects of short-sales constraints and heterogeneous beliefs in driving bubbles and confirms several key findings of the experimental bubble literature. (JEL G12, G13, O16, P34)

Suggested Citation

  • Wei Xiong & Jialin Yu, 2011. "The Chinese Warrants Bubble," American Economic Review, American Economic Association, vol. 101(6), pages 2723-2753, October.
    • Handle: RePEc:aea:aecrev:v:101:y:2011:i:6:p:2723-53
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    References listed on IDEAS

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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