The Chinese Warrants Bubble
In 2005-08, over a dozen put warrants traded in China went so deep out of the money that they were certain to expire worthless. Nonetheless, each warrant was traded nearly three times each day at substantially inflated prices. This bubble is unique, because the underlying stock prices make the zero warrant fundamentals publicly observable. We find evidence supporting the resale option theory of bubbles: investors overpay for a warrant hoping to resell it at an even higher price to a greater fool. Our study confirms key findings of the experimental bubble literature and provides useful implications for market development.
We thank Markus Brunnermeier, Zhiwu Chen, Simon Gervais, Lin Peng, Jose Scheinkman, and seminar and conference participants at Central University of Finance and Economics, Columbia Business School, Princeton University, Renmin University of China, Shenzhen Stock Exchange, Yale University, 2008 CKGSB Summer Finance Conference at Hangzhou, and 2009 NBER Behavioral Finance Conference. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Wei Xiong & Jialin Yu, 2011. "The Chinese Warrants Bubble," American Economic Review, American Economic Association, vol. 101(6), pages 2723-53, October. citation courtesy of