| Abstract: |
In 2005-08, over a dozen put warrants traded in China went so deep out of the
money that they were certain to expire worthless. Nonetheless, each warrant
was traded nearly three times each day at substantially inflated prices. This
bubble is unique, because the underlying stock prices make the zero warrant
fundamentals publicly observable. We find evidence supporting the resale
option theory of bubbles: investors overpay for a warrant hoping to resell it
at an even higher price to a greater fool. Our study confirms key findings of
the experimental bubble literature and provides useful implications for market
development. |