Warrant Pricing Bias in China´s Stock Market and Its Causes

In this paper we study the characteristics of warrant prices and their formation in China´s stock market. We use Hull-White option pricing model (H-W model) to investigate the characteristics of warrant prices, and then adopt the behavior finance theories to study the formation of these characteristics. Our study results show that: all sample warrants have great pricing biases; out-of-the-money warrants are overpriced while in-the-money warrants are underpriced; overpricing of the out-of-the-money call warrant becomes more serious along with the underlying stock price falling; the investors´ overconfidence and their overrating of the probabilities of low-probability events are two main causes of these phenomena.