Effects Of “530” Event On Warrant Market Efficiency

Investors migrated from stock market to warrant market and drove a price bubble after China's government tripled the stamp tax on stock market on May 30,2007.This paper assesses the effects of stock tax rate increase on the market efficiency of Chinese warrants market through an event study.As an option type derivative,warrant should satisfy basic properties shared by all options and function as risk management tool.The start point of this paper is whether the warrants violate these basic properties,thus failing to function as an effective hedging tool,due to the changes of policy.By exploiting violation rates of three properties proposed in Bakshi,Cao and Chen(2000)as proxies,we compare the relative derivative market efficiency before and after this event from a view of market micro-structure.Specifically,the violation rate of monotonicity,perfect correlation and option redundancy properties rises significantly after the stamp tax change.Meanwhile,turnover rate and trading amount can explain the declining market efficiency,which implies that frenzy trading may serve as a channel of the increasing violations.The policy recommendations of this paper are as follows: first,regulators shall consider the policy effects to multiple markets and treat them as a whole;second,more attention should be paid to micro-structure patterns,especially market efficiency.