Do leveraged warrants prompt individuals to speculate on stock price reversals? – Article by Miklós Farkas and Kata Váradi

Using proprietary data on bank-issued knock-out warrants written on a stock index, we find that individual investors’ aggregate warrant portfolio speculates against the short-term trend of the index. We argue that contrarian trading is driven by the interaction of product design and investors’ preference for large leveraged positions. Investors tend to open larger positions whenever warrants offer higher leverage. As a result, investors open an aggregate long position when calls offer higher leverage than puts. Since knock-out leverages move systematically with the underlying, aggregate warrant positions become contrarian even if investors do not intend to speculate on reversals. 

Farkas, M., & Varadi, K. (2021). Do leveraged warrants prompt individuals to speculate on stock price reversals? JOURNAL OF EMPIRICAL FINANCE, 63, 164–176. https://doi.org/10.1016/j.jempfin.2021.07.001 

SJR 2020: 1.467 

Q1 (Economics and Econometrics; Finance) 

AIp 2020: 71 

Dr. Váradi Kata kata.varadi@uni-corvinus.hu Rektori Szervezet / Pénzügy Intézet / Vállalati Pénzügyek

Intézetvezető, Egyetemi docens / Head of Institute, Associate Professor
E épület, 279
Phone: +36 1 482 5156 • Ext: 5156

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