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Callable bull bear contracts, liquidity and stock price manipulation : evidence from HK

English Abstract

This study examines the issuance, expiry and Mandatory Call Events (MCE) of Callable Bull Bear Contracts (CBBC) on the stock market. We analyze these effects on price, volume, systematic risk and liquidity of underlying assets. We find that 67.71% single stock CBBCs are called back before expiry through 2006 and 2010, and CBBC investors lost about 33% of their investment value. Our results show that systematic risks and total risk of the underlying stocks decrease during both CBBC issuance and termination (expire or MCE). We find significant abnormal returns and volumes before the MCE of CBBCs which may imply impact of rewinding of hedged positions. This can also be explained by the potential stock price manipulation from the issuers to trigger the MCEs, since there are pecuniary benefits to retrieve the contracts earlier. Consistent with prior studies, we find that there are no abnormal price effects around the announcement or the listing of the CBBCs. However, we find abnormal volume around the announcement of CBBC listing, suggesting there are significant impact to the underlying stock liquidity. Our findings suggest that CBBC trading reduce the liquidity and increase the effective spread for the underlying stocks. Our study suggests that restricting issuers from unwinding before CBBC termination could enhance CBBC investors protection. Financial innovation may create new incentives for institutions to manipulate the market, and thus create significant impact on the stock liquidity and transaction costs.

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Yu, Ming Min


Faculty of Business Administration


Department of Finance and Business Economics


M. Sc.


Stock warrants -- Hong Kong

Investment analysis -- Hong Kong

Stock price forecasting -- Hong Kong


Lei, Cheuk Hung

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