Chinese Warrants Market Speculative Bubble

This paper aims to conduct a systematic observation and analysis of the Chinese speculative warrant bubbles by applying theoretical and positive analysis methods. We find strong evidence that speculative bubbles do remarkably prevail in Chinese warrant markets and further conclude that the rational bubbles and irrational bubbles both exist. We find a small number of call warrants and a large proportion of put warrants behave eccentrically in interaction with the underlying stocks as well as the stock market indices. By running a regression of the warrant panel data, we find the positive feedback mechanism of the warrant bubbles (the deviation from the fundamentals based on BS option pricing model), and find the fact that the bubble moves positively with the warrants' moneyness, volatility, and the time to maturity, and negatively with the warrant price of last period. Moreover, while characterizing the price behavior of the warrants approaching maturity, we find that besides the maturity fixed effect warrant prices have positive correlation with turnover ratio, volatility but negative correlation with the float size. During the 10-day interval in which warrants get due, we find that the underlying stocks obtain weak average abnormal return but persistent positive cumulative average abnormal return accompanied with an enlarged trading volume for call warrants during the exercising days. Furthermore, the warrant issuance mechanism does prove to alleviate the bubble to some extent but no cure for the whole bubble. Through variance ratio test, we find the Chinese warrant markets do not reach weak form market efficiency, and simple trading rules of technique analysis prove some kind of efficacy. And, we find the greater fool theory and the resale option theory could fairly explain the Chinese warrant speculation. Last, as we analyze the players, we see the fewer big individuals, who trade most frequently with big money, are riding the bubbles by manipulating the markets while the more small individuals follow. We suggest that small investors'psychological bias such as overconfidence, anchoring and disposition effect can account for some of the irrational behaviors in Chinese warrant bubbles.