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

The Winners and Losers in Taiwan’s Warrants Market 192 2. Design/Methodology/Approach In this paper, we develop three empirical hypotheses regarding individual investors in Taiwan’s warrant market. The first is that individual investors are the losers in the market. The second is that aggressive orders by individual investors lead to higher trading losses than their passive orders. The third hypothesis is that individual investors suffer higher losses if they trade out-of-the-money warrants, American warrants, and call warrants, than if they trade in-the-money warrants, European warrants, and put options, respectively. We test these hypotheses using the data of Taiwan’s warrant market from January 1, 2013 to the end of 2014. Our sample consists of 23,730 warrants and 34,499,928 observations. This paper follows Barber et al. (2009) to estimate the profits and losses of individual investors and dealers (which usually are the warrants’ issuers and brokers). For each trading day, based on the trading data, we calculate the dollar profits and rate of return for individual investors and dealers in different holding periods (1, 5, 10, 20, and 40 days). We then examine whether the mean dollar profits and rates of return of individual investors and dealers are significantly different from zero. To examine our hypotheses, we divide the sample into subsamples according to whether (1) the order is aggressive or passive, (2) the warrant is a US or European warrant, (3) the warrant is out- or in-the- money, and (4) the warrant is call or put. We compute the dollar profits and rates of return for individual investors and dealers in each subsample. We further conduct the regression analysis as a robustness analysis. The dependent variable is the return of individual investors on a warrant. The independent variables include variables related to investors’ trading behavior, the characteristics of the warrant, and the characteristics of the warrant’s underlying stock. 3. Findings Our results show that individual investors are the losers in Taiwan’s warrant market, while issuers, market makers (dealers), brokers and the government are the winners. Because a warrant’s time value declines as time goes by, the warrant holders suffer a loss. Thus, the main losers are individual investors, who are the net buyers of warrants. In our sample period between 2013 and 2014, individual investors lost NT$22.912 billion, including the spreads (NT$13.76 billion), time value losses (NT$4.275 billion), trading losses (NT$957 million), transaction taxes (NT$1.02 billion), and fees (NT$2.9 billion).