Abstract
Using proprietary data on bank-issued knock-out warrants written on a stock index, we find that individual investors’ aggregate warrant portfolio speculates against the short-term trend of the index. We argue that contrarian trading is driven by the interaction of product design and investors’ preference for large leveraged positions. Investors tend to open larger positions whenever warrants offer higher leverage. As a result, investors open an aggregate long position when calls offer higher leverage than puts. Since knock-out leverages move systematically with the underlying, aggregate warrant positions become contrarian even if investors do not intend to speculate on reversals.
| Original language | English |
|---|---|
| Pages (from-to) | 164-176 |
| Number of pages | 13 |
| Journal | Journal of Empirical Finance |
| Volume | 63 |
| Early online date | 12 Jul 2021 |
| DOIs | |
| Publication status | Published - 1 Sept 2021 |
Bibliographical note
Funding Information:This paper is a revised version of Chapter 3 of Mikl?s's PhD thesis at Central European University. We are grateful to P?ter Kondor, Botond K?szegi and Adam Zawadowski for valuable guidance. Also, we would like to thank Zsolt Bihary, Sonny Biswas, George Bulkley, Tobin Hanspal, Balint Horvath, Sergey Lychagin, Mikl?s Koren, Silvina Rubio and anonymous referees for comments as well as participants at the FEBS Meeting 2018, the Hungarian Economic Society Meeting 2017, the Seventh Annual Financial Market Liquidity Conference, ERIC 2019 and seminar participants at the University of Bristol. We thank Yang Yue for excellent research assistance. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.
Publisher Copyright:
© 2021 Elsevier B.V.
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