New Investors and Bubbles: An Analysis of the Baosteel Call Warrant Bubble

This paper provides an empirical analysis of the trading behavior and the impact of new investors on the bubble surrounding the Baosteel call warrant, the first derivative traded in China after a nine-year suspension. First, we find that the new investors initiated the bubble. Second, echoing common wisdom, we empirically show that the continuous entries of new investors sustained the bubble. Third, we attribute the slow drop of the warrant price at the approach of maturity to new investors. Compared with other factors, the continuous inflow of new investors was the most powerful driving force of the bubble over the whole trading period. JEL classification: G12, G14, G18