The Chinese Warrants Bubble
Coauthor(s): Wei Xiong.
In 2005–08, over a dozen put warrants traded in China went so deep out of the money that they were almost certain to expire worthless. Nonetheless, each warrant was traded more than three time each day at substantially inflated prices. This bubble is unique in that the underlying stock prices make warrant fundamentals publicly observable and that warrants have predetermined finite maturities. This sample allows us to examine a set of bubble theories. In particular, our analysis highlights the joint effects of short-sales constraints and heterogeneous beliefs in driving bubbles, and confirms several key findings of the experimental bubble literature.
Source: American Economic Review
Xiong, Wei, and Jialin Yu. "The Chinese Warrants Bubble." American Economic Review 101 (2011): 2723-2753.