Department of Economics
Empirical test of the efficiency of the UK covered warrants market: Stochastic dominance and likelihood ratio test approach
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.
Bootstrap likelihood test, Covered warrants, Market efficiency, Stochastic dominance
Source Publication Title
Journal of Empirical Finance
Link to Publisher's Edition
Chan, C., De Peretti, C., Qiao, Z., & Wong, W. (2012). Empirical test of the efficiency of the UK covered warrants market: Stochastic dominance and likelihood ratio test approach. Journal of Empirical Finance, 19 (1), 162-174. https://doi.org/10.1016/j.jempfin.2011.09.001