An Empirical Analysis of the Price Behavior of Taiwanese Stock Warrants
Date Issued
2001-08-30
Date
2001-08-30
Author(s)
Jian, Mei-Yun
DOI
20060927122731601943
Abstract
Taiwanese stock warrants have been traded well above their theoretical prices since their
inception in 1997. Instead of trying to provide explanations for the overpricing phenomenon, we
investigate the behavior of the magnitude of overpricing over time. Through AR model, we first
find significantly negative relationship between the magnitude of market overpricing and the
returns of the underlying shares. However, the negative relationship vanishes when all
end-of-month data are discarded and the usual factors such as the time-to-expiration, moneyness
and liquidity are controlled. Month-end buying activities may have been created mostly by the
warrant-issuing securities firms for the fear of reporting too much unrealized loss on their
warrant positions, especially in the market downturns. Alternatively, if naïve warrant investors
prefer to hold their positions due to the lack of liquidity in the unfavorable market situations, the
overpricing of warrants would also get more serious.
When the unexpected shocks are fitted into the AR -GARCH model, the-first-order
autocorrelation of daily mispricing is clearly verified. Both GARCH and ARCH effects are
detected in the variance equation in most cases. For asymmetric analysis, we find that the
impacts of bad news on future volatility is greater than those of good news of the same
magnitude, consistent with the previous literature. The leverage effect and volatility feedback
effect, however, fail to capture the essence of warrant overpricing.
Publisher
臺北市:國立臺灣大學財務金融學系
Type
report
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