Empirical Study on Prices, Trading Volumes, and Arbitrages of Listed Subscription Warrants

Abstract

This study analyzes the price patterns, trading volumes, and arbitrage opportunities of listed subscription warrants using 70 detachable public bonds with warrant issuances. The major findings of this study are as follows. First, the subscription warrant prices at the listing date are, on average, 69.3% of the adjusted Black-Scholes (BS) prices. Second, subscription warrant prices increased after listing, and the cumulative return for 100 days is 28.45%～46.75%, depending on the assumption. In addition, as the subscription warrants price/adjusted BS price ratio increases, the undervaluation problem slowly disappears. Third, the abnormal trading volume of short sales around warrant listings is statistically significant and persists for at least one year. Fourth, consistent with the third result, long-run underperformance is significant, with one-year cumulative abnormal returns of -11.71%～-28.53%. These facts of decreasing stock prices, increasing subscription warrant prices, and abnormal short sales after warrant listing serve as potential evidence of subscription warrant arbitrages, with around 20% return on the one-year investment horizon.