What Caused Chinese Warrant Price Deviations: Speculation or Creation Mechanism?∗

By empirical studies of Chinese warrants pricing, we find there are systematic devi-ations in warrants price that call warrants are under valued and put warrants are over valued. Using high frequency data, we do further researches about the reasons of sys-tematic deviations according to the prospect theory and resell option theory owing to heterogeneous beliefs. The main reason caused the systematic deviations is the asym-metries in the risk exposure of warrants issuers. These asymmetries make the reference price of PT/MA investors low for call warrants issuers and high for put warrants issuers. These factors cause the systematic deviations in Chinese warrants. Individual specula-tion behaviors can explain only small parts of warrants price deviations.consequently, we think the main reason caused systematic price deviations is warrants creation mecha-nism, which create defective warrants, rather than only caused by individual investors’ speculative behaviors