Empirical Analysis On The Impact Of Warrant Issuance On The Underlying Stock's Price, Liquidity And Volatility

In August 2005, the warrant Baogang JTB1 listed successfully on the SHSE, which brought back warrants to our capital market after 10 years. The introduction of warrants quickly caused the passion of investors and the climax of their trade, and obtained the outstanding performances in the one year. As the new method to compensate investors for allowing the company's non-tradable shares to be listed on the securities market in the process of equity division reform, the warrants have solved the compensating problem, remedied the faults of security market, brought the whole market confidence and made the active effects on closing the six-year bear market. The warrant is the primary derivative product which has become the brick of knocking the door of our derivative market and has active and important effects on the financial innovation and the development of other financial products.The warrant has the high liquidity, remarkable leverage and the use of locking risk and reducing transaction costs. The warrant has simple structure, low risk and the function of connecting the issuance market and the secondary market. All the advantages of the warrant make it be chased by the investors around the world and develop quickly. As the option, the introduction and listing of the warrant should have the impact on the underlying stocks. At present the researches on the issuance effects of the warrant have largely concentrated on the development countries' and Hong Kong's markets, and have the inconsistent concludes. There is a broadly accepted conclude that the issuance of the warrant has been associated with significant price increases, liquidity increases and volatility decreases in the underlying stock market. The purpose of this paper is to explore the impact of warrant issuance on the trade activities of underlying stocks by empirical analysis. The dataset consist of a sample of 16 call warrants and 11 put warrants, which are listed on the SHSE and SZSE between August 2005 and December 2006. Event study methodology is used by the paper to examine the changes of average abnormal returns (AAR) and cumulative average abnormal returns (CAAR), the market-adjusted volume ratio (MAVR) and the self-adjusted volume ratio (SAVR), the market-adjusted amount ratio (MAAR) and the self-adjusted amount ratio (SAAR),βand variances of return. Basing on the results of examining the impact on price, liquidity and volatility of underlying stocks after warrant issuance, the paper concludes that: (1) the issuances of warrant has the temporary positive effects on the underlying stocks' price and the positive effects happen on the introduction day but not on the listing day. (2) The issuance of the warrants causes the underlying stocks' trading volume and amount increases and heighten their liquidity. (3) The issuance of the warrants has no impact on the system risk-β, but decreases the total risk and volatility of underlying stocks.The conclusions of this paper provide more information on the trading behavior of underlying stocks surrounding warrant issuance for the investors and enable investors to make informed investment decisions. The conclusions have the directing effects for stock exchange supervisors on properly designing the trading method and treats of underlying stocks, and improving efficiency and equity of warrants market, and developing new financial derivative products and improving security market.