This paper examines various impacts arising from the introduction of derivative warrants on the risks, returns and trading activity of the underlying assets. The results reveal many features of the impacts of derivative warrants that distinguish them from standard options. We find that there is a discernible post-issue underperformance of the underlying stocks. The results suggest that investment banks demonstrate the ability for the selection of overvalued stocks as the underlying assets for derivative call warrants. We also find that investment banks tend to issue warrants on stocks that have demonstrated recent increase in volatility. The empirical results show that whilst trading volume, systemic risk and liquidity are unaffected, variance of the underlying asset decreases in response to the introduction of derivative warrants.
|Number of pages||16|
|Journal||Investment Management and Financial Innovations|
|State||Published - 1 Jan 2006|
- Derivative warrants
- Hedging effect
- Investor overreaction
- Market timing