The Price, Liquidity and Volatility Effects of Covered Warrant Introductions: Finnish Evidence

Abstract

Covered warrants have been traded in Finland since the 8th of December 2000. These instruments allow investors to gain leverage and also to speculate on the future value of an underlying asset with minimal capital. How does this affect the stocks underlying the covered warrants, if at all? What are the implications of the issuance of this kind of instruments to the overall market? The impacts of these instruments have been under debate in academic literature for over three decades.

This thesis adds to the already existing literature by studying the impact of first-time introductions of covered warrants on a sample of underlying stocks traded on NASDAQ OMX Helsinki. The examined time period is between the years 2000 and 2007. The dataset consists of all first-time issued covered warrants traded in the Finnish stock market during this period. 22 stocks with first-time issued covered warrants are found and after adjustments 14 stocks are selected to the sample. The price, liquidity and volatility impacts of the first time covered warrant introductions to the underlying stocks are studied. To test for these impacts a time interval of 90 days before and after the introduction and issuance dates of the covered warrants is examined, with both unadjusted and market adjusted metrics. To control for the small sample size, effect size tests are utilized.

The results of the empirical tests are inconclusive. No impact on the prices of the underlying stocks is found. Liquidity metrics show some increase in bid-ask spreads, even though this increase is not completely attributable to the warrant issuance. Volume is found to increase. Volatility is found to be relatively stable surrounding the listing dates of the covered warrants, with some decline witnessed.