TY - JOUR
T1 - Empirical test of the efficiency of the UK covered warrants market
T2 - Stochastic dominance and likelihood ratio test approach
AU - Chan, Chia Ying
AU - De Peretti, Christian
AU - Qiao, Zhuo
AU - WONG, Wing Keung
N1 - Funding Information:
The authors are grateful to the Editors and two anonymous referees for substantive comments that have significantly improved this manuscript. This research is partially supported by Yuan Ze University, University of Lyon, Institute of Financial and Insurance Sciences (ISFA), University of Macau, Hong Kong Baptist University, and the Research Grants Council (RGC) of Hong Kong.
PY - 2012/1
Y1 - 2012/1
N2 - This paper represents the first attempt to apply a stochastic dominance (SD) approach to examine the efficiency of the UK covered warrants market. Our empirical analyses reveal that neither covered warrants nor their underlying shares stochastically dominate the other, indicating the nonexistence of potential arbitrage gains in either wealth or utility, which implies market efficiency. To complement the SD results, we also employ a likelihood ratio (LR) test to examine information efficiency. A bootstrap methodology is developed to correct the size distortion of the LR test. Our findings show that UK covered warrant returns efficiently reflect the return information of the underlying shares.
AB - This paper represents the first attempt to apply a stochastic dominance (SD) approach to examine the efficiency of the UK covered warrants market. Our empirical analyses reveal that neither covered warrants nor their underlying shares stochastically dominate the other, indicating the nonexistence of potential arbitrage gains in either wealth or utility, which implies market efficiency. To complement the SD results, we also employ a likelihood ratio (LR) test to examine information efficiency. A bootstrap methodology is developed to correct the size distortion of the LR test. Our findings show that UK covered warrant returns efficiently reflect the return information of the underlying shares.
KW - Bootstrap likelihood test
KW - Covered warrants
KW - Market efficiency
KW - Stochastic dominance
UR - http://www.scopus.com/inward/record.url?scp=84455205714&partnerID=8YFLogxK
U2 - 10.1016/j.jempfin.2011.09.001
DO - 10.1016/j.jempfin.2011.09.001
M3 - Journal article
AN - SCOPUS:84455205714
SN - 0927-5398
VL - 19
SP - 162
EP - 174
JO - Journal of Empirical Finance
JF - Journal of Empirical Finance
IS - 1
ER -