Market Manipulation And Excessive Volatility Of The Warrants Market In China

As one of the most important financial derivatives in China's capital market,warrants have attracted great attention and the research on the volatility of its price has valuable meanings.As China's warrant market have exhibited many abnormal features,such as momentum trading,blind faith in "gossip",high turnover rate,high premium rates,excessive volatility of the price and etc.,which could be taken as the concentrated expression of the anomalies in China's stock market.As a matter of fact,it is really necessary for us to go deep into the psychology of the investors as well as their trading strategy in the warrant market from the perspective of behavioral finance, which could give us a overall understanding about the excess volatility of the warrant market.This paper has started with the research on the phenomenon of excessive fluctuations in China's warrants market.Through inspection of the price of the warrants,the paper find that there are many abnormal features in the price of warrants,such as high turnover rate,high premium levels,big difference between warrant price and its theoretical value,non-descending feature of the time value of warrants and etc.In addition,China's warrants market has a strong atmosphere of speculation.The warrant which is close to its ending day often encountered frenzied speculation and experienced skyrocketing crash.Based on the analysis above,the paper implemented further inspection of the characteristics of the investors in warrants market and Arrow-Pratt formula is used to measure the extend of risk preference.The results showed that the investors have outstanding features of risk preferences,which could be explained by the theory of behavioral finance,including mental accounts, over-confidence,anchoring effect,disposition effect,mean reversion and etc.With premises that can reflect the realities in our warrant market,the paper builds a model of trade-based market manipulation.It proves that the market manipulators can profit from the strategy of "pump and dump" and the profits of manipulation is correlated with the disposition effect of the market. The stronger the disposition effect,it's easier for the manipulator to make a profit.In addition,given a period of market manipulation,the extent that the price is pumped is positively correlative to the requested rate of return of the manipulator.