Excessive Speculation, Manipulation, And China's Warrants Market Fluctuations

Warrant first appeared in China's financial market in 1992;however it was canceled years later due to heavy speculation.In 2005 warrant made its way back with the Stock Rights Division Reform and developed rapidly.However, research and related data suggest that warrants are still subject to heavy speculation and manipulation with features of high turnover rate,high premium rates,momentum trading,etc.This paper discusses the fundamental causes for the excess volatility from the perspective of investors' psychology.This paper identifies two types of warrant market participants through behavioral study."Dahu" is small in number,but has significant capital advantage and accounts for most of the trade volume;"San & Xiaohu" is big in accounts number but with little capital and trade volume.From the positive correlation of intraday price fluctuation and daily turnover rate,and some other measurements,the paper proves that warrant market participants are highly volatility-seeking.Studies of warrants' ending days extraordinary performance in terms of price fluctuation,trading volumes and turnover rates,as well as "530"event,further prove the speculative atmosphere,especially in China's put warrant market.Based on psychological concepts of conservatism and representative heuristic,and more realistic assumptions,the paper builds a speculator expectation-forming model from the base of BSV model,and identifies that it is speculators' under- and over-reaction that makes manipulator's manipulating strategy possible,which complements Xu Xinqiao(2008)'s "pump and dump" model to explain the over-fluctuation in the warrant market.Also,this paper finds that the extent of speculators' under- and over-reaction is positively related to manipulator' profitability.