Warrants and their underlying stocks: Microstructure evidence from an emerging market
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Date
27/09/2018
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Virtus Interpress
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Abstract
The Stock Exchange of Thailand provides an ideal platform for comparing the trading characteristics of warrants and their underlying stocks since both of them trade in the same market under identical trading rules. If their patterns diverge significantly, it may be possible for an astute trader to devise profitable arbitrage strategies during the life of the warrants. We find that both their patterns are downward-sloping for spreads, U-shaped for flow toxicity, volatility, depth concentration, and trading volume; and upward-sloping for depth and market order flow ratio. This implies that trading under identical market structures leads to similar trading characteristics. We document that flow toxicity is negatively related to spread and positively related to depth, market order flow ratio, trade size, trading volume, and volatility.
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Risk Governance and Control: Financial Markets & Institutions, 2018, 8 (3), pp. 43 - 60 (18)