Empirical Research on the Relationships between China Warrants and Underlying Stock

Abstract

Through an empirical test, different relationships on call-warrants and put-warrants with their underlying stocks were analyzed. Moreover, whether the effects of warrants on the underlying stocks are same in notice day and list day were analyzed. Correlation coefficient of warrants with their underlying was computed and cumulative abnormal yield and abnormal volatility in notice day and list day were also computed chiefly. The result of the research shows that the call-warrants have high relevance with their underlying stock, and the listing of warrant has no explicit effect on China stock market. In 2005, along with the process of China shareholding structure innovation, warrants recurred in China Stock Exchange as a tool of the innovation. Until July in 2008, the amount of warrants issued in China Stock Exchange was 49 in all. 34 had been matured, and the other 15 were still being trade off. 17 were call -warrants, and 18 were put-warrants. Although China Stock Exchange is still in the primary phase, there are only a little sorts and amounts about warrants, but the impact of warrants on underlying stock can not be ignored. The purpose on the reissue of China warrants is to fix on the consideration in the innovation of China shareholding structure, increase the sorts of financial products, decrease the fluctuation of price in financial market, and reduce the financial risk. From the financial crisis occurring all over the world recently, we can learn a lesson that the derivatives can not always decrease the risk in capital market. The leverage of the derivatives increases the risk of investment for both investors and issuers on the contrary. So we must find out the impact of warrants on underlying stock market clearly, and to avoid the negative impact of derivatives. According to the different anticipation on price of underlying stocks, warrants can be divided into call-warrants and put-warrants. Call-warrants are contracts that give right to investors by issuers that they can buy determinate underlying stock on strike price in maturity date. Put-warrants are contracts that give right to investors by issuers that they can sell determinate underlying stock on strike price in maturity date. In theory, the issue of call-warrants and put-warrants must take the underlying stock as foundation. So the relationship between warrants and underlying stock should be tight. According to the value features of warrants, call-warrants are positive with the price of underlying and put-warrants are negative with it. At the maturity day of warrants, the value of call-warrants will be higher if the price of underlying stock is higher, and in the same situation the value of put-warrants will be lower. But we can always find that in China warrants markets the same trend of call-warrants and put-warrants along with the price of underlying. At the same time, there are two important time points in the issue process of warrants, one is declaring day for issue and the other is listing day. The different impacts of warrants on underlying stock in these two different days are also the emphasis in this research.