Furthermore, On The Theory Of Convenience Benefits And Warrants Market Prices Declined

Since the first warrant-Bao Gang warrant were listed for trading in August2005, Chinese warrant market has been extremely active. Indeed, trading in equity warrants took on a life of its own that often seemed disconnected from the trading of the underlying stocks. We document that warrant market price consistently and persistently deviate far away from their fundamental values:daily put warrant market prices averaged0.87Yuan more than model-generated prices, and daily call warrant market prices averaged approximately1.8Yuan more than model-generated prices. Financial institutions that were authorized to create new warrants generated23billion Yuan for put warrants creation, and1.7billion Yuan for call warrants creation. All of these indicate that Chinese warrant market exist price deviation. Why was the Chinese warrant market price so consistently mispriced? Eric Powers, Gang Xiao and Hong Yan(2009) argued that an important driver for the high trading turnover and the persistent mispricing in the Chinese warrant market is its unique settlement rules, which contributes to the "convenience yield". And the warrant price deviation is the premium for the "convenience yield". Our paper aims to verify the validity of this hypothesis and improve the weakness in the Eric Powers’research. Finally, we try to looking for an observed variable as the proxy variable for the warrant price deviation. According to the proxy variable, we can not only analyze the reasons of the warrant price deviation, but also avoid the trouble of the theoretical pricing error.Our paper is organized as follow. In chapter1, we will review the researches about Chinese warrant market price deviation and introduce the research of Eric Powers, Gang Xiao and Hong Yan(2009). In chapter2, we will document the warrant price error from three different angles. In chapter3, we will introduce the warrant trading activity and the unique settlement rules. In chapter4, we will calculate the warrant’s theoretical price according to the BS model and binary tree pricing model. In chapter5, we will introduce the theoretical analysis about Chinese warrant price error. In chapter6, we will introduce the empirical analysis and improve the weakness in the Eric Powers’research. In chapter7, we will try to looking for an observed variable as the proxy variable for the warrant price deviation, and verify the convenience yield hypothesis through this proxy variable.