Price and volume effects associated with listings and expirations of derivative warrants on the stock exchange of Hong Kong

Abstract

This paper examines the price, volume, and volatility effects of underlying stocks around the announcement date, the first trading date, and the expiration date of derivative warrants issued in Hong Kong. In general, the price and volume effects are only associated with the announcements, but not with listings or expirations. The derivative warrants are issued after a sharp increase in the underlying stock prices with a cumulative price increase of 2.32% in the previous five trading days and another 0.88% on the announcement date. Further, the prices of the underlying stocks increase significantly (with an average of 0.81 ticks) in the last 5 trading minutes of the announcement date. The underlying stock prices are, however, virtually flat after the announcement of the warrant issuance. This suggests that investment banks may have the ability to time the market to issue warrants. However, we do not find any price effects around the first trading date We also find that the underlying stock prices do not drop before expiration, indicating that there is no evidence that warrant issuers push down the underlying stock prices near expirations. The newly issued warrants are priced insignificantly different from the corresponding existing derivative warrants. The trading volume of the underlying stocks is higher relative to the market around the announcement date and peaks on the day following the announcement, consistent with the increase in the underlying stock prices and/or the investment banks' hedging strategies. Finally, we cannot document any volatility change in the underlying stock prices around the announcement date, the first trading date, or the expiration date of derivative warrants.