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

193 NTU Management Review Vol. 30 No. 1 Apr. 2020 We further find that individual investors suffer higher losses when they trade out-of- the-money warrants, American warrants, and warrants with longer durations. The losses of individual investors are also higher when they trade the warrants with lower issue prices, or warrants whose underlying stocks have higher volatility or lower capitalization. In addition, the losses of individual investors increase as the holding period increases. These results suggest that investors lose more when they trade lottery-like warrants. They also imply that the loss in time value is an important source of individual investors’ losses in the warrant market. 4. Research Limitations/Implications The reason for why individual investors are losers in the warrant market may be that they are irrational due to overconfidence or the neglect of their disadvantages in information and professional knowledge. Another possibility is that, similar to what Gao and Lin (2015) find in Taiwan’s stock market, individual investors may consider trading warrants as a gambling entertainment. We think both are possible reasons, but are unable to identify which of them is more important for explaining why individual investors are the losers in the warrant market. The results of this paper have implications for individual investors. Warrants are more risky and more complicated than stocks. In addition, unless used as a hedging tool, the trading of warrants is a zero-sum game. Because individual investors are usually at a disadvantage in information and trading skills when compared with dealers, they should think twice before they decide to trade in the warrant market. To promote the fairness of trading and sound development of the warrant market in Taiwan, we suggest the regulators to undertake the following reforms. First, strengthen the market-making mechanism of the warrant market. Second, regularly evaluate securities dealers via ranking the spreads and market depth of the warrants that they issue. Finally, allow individual investors to short-sell warrants after adequate corresponding regulations are imposed. For the period, from 2013 to 2014, the amount of spreads that individual investors pay is NT$13.8 billion in the warrant market, which comprises 60% of their total losses (NT$22.9 billion). Therefore, for the market-making mechanism, we recommend regulators to: (1) ask the dealers to narrow the spreads, (2) increase the depth of the