Working Paper: NBER ID: w15481
Abstract: 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.
Keywords: warrants; bubbles; resale option theory; speculation; China
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Heterogeneous investors and short-sale constraints (G19) | inflated prices for warrants (G19) |
| Time remaining (C41) | price dynamics (E30) |
| Trading volume (G15) | price bubbles (E32) |
| Historical price movements (N23) | current trading volume (G15) |