臺大管理論叢 NTU Management Review VOL.30 NO.1

191 NTU Management Review Vol. 30 No. 1 Apr. 2020 The Winners and Losers in Taiwan’s Warrants Market 1. Purpose/Objective This paper identifies the winners and losers in Taiwan’s warrant market by estimating the profits and losses of investors in the market. It also analyzes the factors that affect investors’ profits and losses. Since the introduction of warrants in Taiwan in 1997, the market has grown rapidly. The annual trading volume grew from NT$1.9 billion in 1997 to NT$645 billion in 2015, with an average annual growth of 87%. The number of warrants issued increased from 52 in 1999 to 20,037 in 2015, with an average annual growth of 55%. From 1997 to 2015, the cumulative trading volume of Taiwan’s warrant market exceeded NT$4 trillion, while the cumulative number of warrants issued approached 110,000. Given that Taiwan’s warrant market is large and growing rapidly, it is interesting to study how different types of investors perform in this market. Barber, Lee, Liu, and Odean (2009), Chang, Hsieh, and Lai (2009), and Chou and Wang (2009) show that individual investors are at a disadvantage in Taiwan’s stock, index options, and index futures markets, respectively. Compared with stocks, index futures, and index options, warrants for individual stocks are more volatile and more difficult to evaluate, so the disadvantages of individual investors in the warrant market should be more severe. Traders in Taiwan’s warrant market consist largely of dealers (which usually are the warrants’ issuers and brokers), and individual investors, each accounting for around 50% of the trades. This raises several interesting questions. If individual investors are at a disadvantage, why do they participate? Is it because they are not aware of their disadvantages? Do they consider warrant trading as a gambling entertainment, so are willing to accept negative expected returns? Can they earn high rewards from warrant transactions? To answer these questions, this paper analyzes the profits and losses of individual investors and dealers in Taiwan’s warrant market, and examines the determinants of individual investors’ profits and losses. 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