Why are derivative warrants more expensive than options? An empirical study

Gang LI*, Chu Zhang

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

15 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)275-297
Number of pages23
JournalJournal of Financial and Quantitative Analysis
Volume46
Issue number1
DOIs
Publication statusPublished - Feb 2011

Scopus Subject Areas

  • Accounting
  • Finance
  • Economics and Econometrics

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