Empirical test of the efficiency of the UK covered warrants market: Stochastic dominance and likelihood ratio test approach

Chia Ying Chan*, Christian De Peretti, Zhuo Qiao, Wing Keung WONG

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

28 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)162-174
Number of pages13
JournalJournal of Empirical Finance
Volume19
Issue number1
DOIs
Publication statusPublished - Jan 2012

Scopus Subject Areas

  • Finance
  • Economics and Econometrics

User-Defined Keywords

  • Bootstrap likelihood test
  • Covered warrants
  • Market efficiency
  • Stochastic dominance

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