http://dx.doi.org/10.1016/j.jempfin.2011.09.001">
 

Document Type

Journal Article

Department/Unit

Department of Economics

Title

Empirical test of the efficiency of the UK covered warrants market: Stochastic dominance and likelihood ratio test approach

Language

English

Abstract

This paper represents the first attempt to apply a stochastic dominance (SD) approach to examine the efficiency of the UK covered warrants market. Our empirical analyses reveal that neither covered warrants nor their underlying shares stochastically dominate the other, indicating the nonexistence of potential arbitrage gains in either wealth or utility, which implies market efficiency. To complement the SD results, we also employ a likelihood ratio (LR) test to examine information efficiency. A bootstrap methodology is developed to correct the size distortion of the LR test. Our findings show that UK covered warrant returns efficiently reflect the return information of the underlying shares. © 2011 Elsevier B.V.

Keywords

Bootstrap likelihood test, Covered warrants, Market efficiency, Stochastic dominance

Publication Date

2012

Source Publication Title

Journal of Empirical Finance

Volume

19

Issue

1

Start Page

162

End Page

174

Publisher

Elsevier

ISSN (print)

09275398

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