Do put warrants unwind short‐sale restrictions? Further evidence from the Taiwan Stock Exchange

Abstract

This study investigates the relationship between stock short‐selling restrictions and bearish equity warrants on the Taiwan Stock Exchange to clarify the substitutive role of put warrants for underlying stocks subject to short‐sale constraints. We show that put warrant transactions increase when short selling is prohibited in the spot market and the substitutive increase in trading also leads to wider bid–ask spreads and higher implied volatility for put warrants. Moreover, we find that the increased trading activities in put warrants could subsequently affect spot market trading through warrant issuers' required dynamic hedging behaviors.

Pricing levered warrants under the CEV diffusion model

“…Given their particular features, warrants have been greatly used recently. For example, Chuang et al (2021) document that, by the end of 2015, there were 10,542 covered warrants on the Taiwan Stock Exchange. There is evidence of usage of warrants as part of underwriter's compensation-see Dunbar (1995), Garner and Marshall (2014) and Khurshed et al (2016), among others-, as stand alone capital raising instruments-e.g., Suchard (2005)-, in unit offerings-see, for instance, Schultz (1993), Byoun and Moore (2003), Gajewski et al (2007) and Howe and Olsen (2009)-, etc.…”