The Winners and Losers in Taiwan's Warrants Market

Chan, C., Chen, Y., Ke, W. C., and Huang, S. C. 2020. The Winners and Losers in Taiwan's Warrants Market. NTU Management Review, 30 (1): 163-200. doi:10.6226/NTUMR.202004_30(1).0006

Chang Chan, Department of Finance and Cooperative Management, National Taipei University
Yehning Chen, Department of Finance, National Taiwan University
Wen-Chyan Ke, Department of Finance and Cooperative Management, National Taipei University
Shang-Chieh Huang, Graduate Institute of Economics, National Taiwan University


This paper investigates profits and losses of different types of participants in Taiwan's warrant market. We empirically show that the winners of Taiwan’s warrant market are warrants issuers, market makers, brokers, and the government, while the losers are individual investors. The losses of warrant holders are caused by the time value decay of warrants, and thus the main buyers, individual investors, become the losers. Individual investors suffer greater losses when trading out-of-the-money warrants and American warrants. They also have greater losses in the trading of warrants with a low issue price, and warrants whose underlying asset has higher volatility or a lower market value. In addition, we show that high spreads significantly increase the transaction costs of warrant holders, which will raise the losses of individual investors. To promote the trading fairness and development of Taiwan's warrants market, we suggest that the regulators should: (1) strengthen the market-making mechanism of warrants, (2) periodically evaluate the performance of warrant issuers, and (3) implement the short-selling mechanism of warrants under complete supporting policies. 


warrants marketwinnerslosersindividual investorsinstitutional investors

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