Warrants Market Is The Creation Of The Effectiveness Of The Mechanisms And Influencing Factors Of Empirical Research

In August 2005, the call warrant Bao Steel JTB1 that was issued in SSE, opened the second prologue of Chinese warrants market. As the compensation for Circulating Shares holders in the non-tradable reform, this kind of special warrant's issuing quantity was small and fixed, so demand was much higher than supply. Consequently, there was unrealistic pricing and hyper-speculations in warrants market of the SSE & SZSE. To balance the demand and supply, SAC launched the creation institution in November 2005.This paper mainly investigates the effectiveness of the creation institution and factors which may influence the performance of the creation institution. I selected all the 40 warrants issued and traded between August 2005 and December 2007 as the empirical samples. The basic findings are as follows:Firstly, by comparing the performance of group of created derivative warrants and the group of non-created derivative warrants and equity warrants, we find that the premium, bias between market price and B-S price, implied volatility of created derivative warrants are not significantly lower than non-created derivative warrants, while significantly higher than equity warrants. This may implicate derivative warrants and equity warrants are quite different in nature, so they encounter different degrees of irrational emotions. And to some degree, this may also suggest that the creation institution is partially effective because it can not increase enough quantity and types of warrants, so it can not stabilize the warrant price fundamentally and essentially, while it can alleviate the hyper-speculations. Secondly, by comparing the performance of created derivative warrants before and after they were created, we find that the creation institution works. By analyzing those affecting factors, we find the creation quantity plays the biggest role in stabilizing price, and the creation institution is more effective in narrowing down the gap between market price and B-S price of those highly-speculated warrants with high turnover rates before they were created. Since there are no other institutions or measures that can stabilize the warrant market, for instance the market maker is not available, the creation institution is necessary in dealing with hyper-speculation, and may be the bridge for entering into a matured warrant market.