Topic: Making the Derivative Warrants Market
Presenter：Ming Liu， Department of Finance， The Chinese University of Hong Kong
Time: April 2, 2010（Friday）3:00—4:30PM
Venue: Room 501, Jiageng Bld 2
Chair： Zhe Shen, assistant professor in finance, IFAS
Abstract：
We investigate market-making practices in a derivative warrants market in which the marketmaker is the sole writer of options. We find that market makers in Hong Kong’s derivative warrant market – the world’s largest derivative warrant market in 2005 – serve both the role of warrant issuers and the role of market maker. By examining daily trading records and the pricing dynamics of index warrants, we show that these roles are largely complementary. They charge a higher option premium at the time of issuance to bear the hedging cost, while charge a narrower bid-ask spread to attract liquidity. We document evidences of cross-subsidy between liquidity provision and warrant issuance. This cross-subsidy is possible in Hong Kong’s warrant market, we argue, as liquidity provider maintains a monopoly position in warrant issuance of the particular warrant.
Presenter Introduction：
Ming Liu is Associate Professor in Department of Finance, Chinese University of Hong Kong, Shatin. He got M. S. in Statistics and Ph.D.in Economics from Duke University and B. E. in Management Science from University of Science and Technology of China. His research Interests include investment and real estate finance.
Download Paper：HKwarrants.pdf