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Why Are Derivative Warrants More Expensive Than Options? An Empirical Study

Published online by Cambridge University Press:  05 November 2010

Gang Li  and
Chu Zhang
Gang Li
Affiliation:
Hong Kong Baptist University (HKBU), Kowloon Tong, Kowloon, Hong Kong. garyli@hkbu.edu.hk
Chu Zhang
Affiliation:
Hong Kong University of Science and Technology (HKUST), Clear Water Bay, Kowloon, Hong Kong. czhang@ust.hk
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 1 , February 2011 , pp. 275 - 297
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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