TY - JOUR
T1 - Why are derivative warrants more expensive than options? An empirical study
AU - LI, Gang
AU - Zhang, Chu
N1 - Funding Information:
∗Li, [email protected], Hong Kong Baptist University (HKBU), Kowloon Tong, Kowloon, Hong Kong; Zhang, [email protected], Hong Kong University of Science and Technology (HKUST), Clear Water Bay, Kowloon, Hong Kong. We thank Stephen Brown (the editor), Du Du, George Jiang, Nengjiu Ju, Ming Liu, Sophie Ni, Qian Sun, Yexiao Xu, seminar participants at the 2008 China International Conference in Finance and Universities of Fudan, HKBU, HKUST, Macau, and Xiamen, and especially Marti Subrahmanyam (the referee) for helpful comments on earlier versions of the paper. Zhang acknowledges financial support from the HKUST research project competition grant RPC06/07.BM28. All remaining errors are ours.
PY - 2011/2
Y1 - 2011/2
N2 - Derivative warrants typically have higher prices than do otherwise identical options. Using data from the Hong Kong market during 2002-2007, we show that the price difference reflects the liquidity premium of derivative warrants over options. Newly issued derivative warrants are much more liquid than options with similar terms. As a result, long-term derivative warrants are preferred by traders who trade frequently. In spite of their higher prices, short-term returns on long-term derivative warrants are, in fact, higher than the hypothetical short-term returns on options. The differences in price and liquidity measures decline as the contracts get closer to maturity.
AB - Derivative warrants typically have higher prices than do otherwise identical options. Using data from the Hong Kong market during 2002-2007, we show that the price difference reflects the liquidity premium of derivative warrants over options. Newly issued derivative warrants are much more liquid than options with similar terms. As a result, long-term derivative warrants are preferred by traders who trade frequently. In spite of their higher prices, short-term returns on long-term derivative warrants are, in fact, higher than the hypothetical short-term returns on options. The differences in price and liquidity measures decline as the contracts get closer to maturity.
UR - http://www.scopus.com/inward/record.url?scp=80053057742&partnerID=8YFLogxK
U2 - 10.1017/S0022109010000670
DO - 10.1017/S0022109010000670
M3 - Review article
AN - SCOPUS:80053057742
SN - 0022-1090
VL - 46
SP - 275
EP - 297
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 1
ER -