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

The Winners and Losers in Taiwan’s Warrants Market 194 warrant market, and (3) periodically rank dealers in terms of the spreads and depths of the warrants they issue, so that the dealers have the incentive to lower the spreads and increase market depth. Chan and Chih (2014) find that the average spread of the warrants issued by the top five dealers with the highest spreads are 3.6 times of that issued by the top five dealers with the lowest spreads, resulting in an 11% reduction in rate of return. Similarly, the depth of warrants issued by the top five dealers with the highest depths is 6.5 times of that issued by the top five dealers with the lowest depths. Regularly revealing the spreads and market depth of the warrants issued by dealers can create pressure for dealers to treat individual investors better. Because short selling is not allowed in Taiwan’s warrant market, the trading strategies of individual investors are not complete. This problem makes individual investors unable to compete fairly with the warrant-issuing dealers, and thus substantially increases the chance that individual investors are the losers in the warrant market. Therefore, allowing individual investors to short sell warrants will improve the trade fairness of the warrant market. 5. Originality/Contribution Chang and Hsieh (2016) and Lin, Chung, and Yeh (2017) provide nice reviews of the literature on Taiwan's derivative financial products. From these papers, the existing literature focuses on the study of Taiwan's futures and options markets. Only few papers study Taiwan's warrants market, and most of them investigate the pricing of the warrants. Our paper is the first one that studies investors’ profits and losses in Taiwan’s warrant market. The study of Barber et al. (2009) is the most related to ours. Compared with Barber et al. (2009), this paper makes the following contributions. First, it analyzes the profits and losses of individual investors in Taiwan’s warrant market, while Barber et al. (2009) explores the profits of losses of individual investors in Taiwan’s stock market. Second, similar to what Gao and Lin (2015) find in Taiwan’s stock market, this paper finds empirical evidence supporting the idea that individual investors in Taiwan’s warrant market may treat warrant trading as a gambling entertainment. Third, Barber et al. (2009) find that individual investors are losers in Taiwan’s stock market because they are too aggressive in trading. By contrast, this paper finds that the decline of time value and the high spreads are two key factors that contribute to the losses of individual investors in Taiwan’s warrant market. Fourth, complementing Barber et al. (2009), Chang et al.