Research On China's Warrant Market Bubble

Along with the gradual development of China's financial industry, more and more financial derivatives appear. There are or have been a total of 54 warrants listed on Shanghai Stock Exchange and Shenzhen Stock Exchange, since the Baoshan Steel Corporation JTB1 came to the market first in August, 2005. However, the pricing efficiency of China's warrant market is still relatively lower than the western matured market. The difference between the B-S theoretical value and trading price is considerably huge, especially for a lot of put warrants deeply out of money, they were still traded above zero significantly despite that they were certain to expire worthless, which showed the existence of price bubble clearly.We've tested three asset pricing bubble theories, and we find little evidence supporting either rational bubble theories or the gamble behavior theories. Instead, we find evidence consistent with the greater fool theory: Investors overpay for a warrant and expect to resell it at an even higher price to a greater fool.Finally, we give some advices on China's warrant market based on our analysis of the warrant market bubble.