The impact of derivatives hedging on the stock market: Evidence from Taiwan's covered warrants market
Journal
Journal of Banking and Finance
Journal Volume
42
Journal Issue
1
Pages
123-133
Date Issued
2014
Author(s)
Abstract
We examine the impact of derivatives hedging on the spot market using accurate hedge ratios of covered warrants traded in the Taiwan Stock Exchange (TWSE). Results present significant positive abnormal returns and trading volumes before the announcement of a warrant's issuance, and the effect is stronger when the hedging demand is larger. Moreover, a significantly positive relationship exists between stock return volatility and the price elasticity of hedging demand. Finally, we observe a significantly negative price effect upon the underlying stock after a call warrant has expired in-the-money due to the liquidation of hedging portfolios. ? 2014 Elsevier B.V.
Subjects
Covered warrants
Expiration effect
Hedging impact
Introduction effect
Price elasticity
Return volatility
Trading volume
Type
journal article