The Chinese Warrant Bubble: A Fundamental Analysis

Assoc Prof. Wang Yintian

Tsinghua University

About the Speaker

Wang Yintian is an Associate Professor in the Finance area at School of Economic and Management. She joined Tsinghua University in 2007. She earned her Bachelor degree in Xi’an Jiaotong University where accounting is her major from 1994 to 1998. Between 1999 and 2000, she broadened her academic career to Queen's University where she received her Master degree in Economics. From 2001 to 2006, she worked as a Research Assistant and obtained her PhD in Finance from McGill University. She teaches Investment, Derivatives, Financial econometrics.

Research Seminar Abstract

Based on a rational option pricing framework that incorporates short-selling and margin-trading constraints in the stock market, we present evidence that Chinese warrant prices, which are regarded as completely bubbles in the previous literature, can be explained by a new option pricing model. Based on the new model, we develop a warrant-price deviation measure to quantify unobserved demand for short-selling or margin trading due to market constraints. We empirically show that warrant-price deviation is driven mainly by underlying stock valuation. We conclude that the Chinese warrant market is better characterized by derivatives rather than a pure bubble detached from underlying assets.