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Call Warrants In China'S Securities Market: Pricing Biases And Investors' Confusion

Author

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  • WEI FAN

    (School of Management and Economics, UESTC, Chengdu, 610054, China;
    Fixed-Income Department, Hongyuan Securities Co. Ltd., Beijing, 100140, China)

  • XINYI YUAN

    (Investment Bank, China Merchant Securities Co. Ltd., Shenzhen, 518000, China;
    School of Management and Economics, UESTC, Chengdu, 610054, China)

Abstract

This paper examines the price performance of call warrants in China's securities market. A recent sample of daily call warrant prices observed during the period from August 2005 to March 2007 is used. To the best of our knowledge this is the only recent study to using data from China and as such it greatly enhances our understanding of this particular market. On average, we find that the observed market prices are irrationally higher than the Black-Scholes model prices by 80.38% (using 180-day historical volatility) and 140.50% (using EGARCH volatility). However, we find another anomalous phenomenon that some of the call warrants prices are not only lower than the model prices, but have also recently been anomalously under their lower bounds. This finding seems to violate the "no arbitrage" principle. Among the convincing reasons, our findings indicate that trading mechanism constraints in China's securities market prevent rational investors from driving the prices of these call warrants to a reasonable level. Arbitrage chances are found to exist in some specific cases when the call warrant prices are below their lower bounds.

Suggested Citation

  • Wei Fan & Xinyi Yuan, 2011. "Call Warrants In China'S Securities Market: Pricing Biases And Investors' Confusion," New Mathematics and Natural Computation (NMNC), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 333-345.
    • Handle: RePEc:wsi:nmncxx:v:07:y:2011:i:02:n:s1793005711001962
    DOI: 10.1142/S1793005711001962
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    Cited by:

    1. Zhou, Qing & Zhang, Xili, 2020. "Pricing equity warrants in Merton jump–diffusion model with credit risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 557(C).
    2. Hana Florianová, 2016. "Trading Strategies for Warrants," Proceedings of Economics and Finance Conferences 4206760, International Institute of Social and Economic Sciences.

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