We present a novel methodology for constructing portfolios to hedge economic and financial risks arising from climate change. We utilize ChatGPT-4 to identify climate-related conversations during earnings conference calls and connect these time-stamped transcripts with high-frequency stock price data pinpointed to the conversation level. This approach allows us to assess a company’s dynamic exposure to climate change risks by analyzing real-time stock price responses to discussions about climate issues between managers and analysts. Our proposed portfolio, constructed by taking long (short) positions in stocks with positive (negative) market responses to climate conversations, appreciates in value during future periods with negative aggregate climate news shocks. Compared to portfolios constructed using alternative methods, our real-time market response-based portfolios demonstrate superior out-of-sample hedge performance. A key advantage of our approach is its ability to capture time-series and cross-sectional variations in stocks’ rapidly-evolving exposures to climate risk, relying on the timing of when climate-related issues become salient topics that warrant conference call discussions and real-time market responses to such conversations. Additionally, we showcase the versatility of our approach in hedging other types of dynamic risks: namely political risk and pandemic risk.

Amongst major economies, China has been taking a lead in the development of central bank digital currency (CBDC), which has generated widespread interest and impact around the globe. China’s CBDC, commonly known as e-CNY, is designed with several distinctive features, enabling it to compare favorably to other payment methods such as credit cards, mobile payment, unbacked cryptocurrency, and stablecoins. A variety of social, economic, political, and regulatory reasons can be identified to help explain China’s active pursuit of CBDC. However, the prospect of success will be affected by many factors and may vary between the domestic and international markets. This paper argues that the adoption of eCNY will likely succeed domestically, but may face more challenges in the international markets. The development of e-CNY seems to have created a catfish effect on other major economies in the race for CBDC. It is not fully clear, however, that the CBDC race will be better explained by the first-mover or the late-mover advantage theory. The CBDC project will have both public and private law implications, and several legal issues warrant particular attention in relation to the legal status of CBCD, the role and responsibility of the central bank, legal remedies for losses suffered by CBDC users from cybersecurity issues and operational problems, and the issue of data privacy and protection.

This study examines whether firms’ financial fraudulent behavior varies when local firms are led by nonlocal CEOs. Building on the social identity theory, we argue that nonlocal CEOs, due to their different location-based social identities, are perceived as outgroup leaders and face intergroup bias from stakeholders within local firms. Therefore, nonlocal CEOs are more likely to conform to laws and regulations and reduce corporate financial fraud to enhance their legitimacy in leading local firms. Using panel data on Chinese listed firms from 2007 to 2020, we find a significantly negative correlation between nonlocal CEOs and the likelihood of corporate financial fraud. Furthermore, our moderating analysis indicate that the negative effect of nonlocal CEOs on corporate financial fraud is stronger (a) for CEOs who have neverwon awards, (b) in firms with poor financial performance and (c) in regions with tight cultures. Additional mechanism tests indicate that nonlocal CEOs’ outgroup identity is more prominent in regions with low regional dialect diversity and local private-owned enterprises. Overall, these findings suggest that choosing a nonlocal CEO warrants attention from the firm’s top management teams and stakeholders.

Shadow banking in China constitutes a dual-track interest rate reform that adds a new market track beside the controlled formal banking track. Shadow banking leads to Kaldor-Hicks improvement if the gains from financing the underfunded private enterprise (PE) and reducing bank capital idleness caused by ultrahigh reserve requirements outweigh the losses from shadow banking risk. Pareto improvement is feasible as the state-owned enterprise (SOE), a potential reform loser, participates in shadow banking to transfer credit to the more productive PE. Full interest rate liberalization, which removes formal banking controls after the dual-track reform, does not warrant additional profit gain if bank credit misallocation favoring the SOE and SOE's low productivity persist.

We examine a unique one day lockup constraint in stock markets in China and contribute to the understanding of impact of non-marketability on asset prices. Buyers of Chinese stocks are subject to a one day lockup and cannot sell their shares until the next day, but warrant traders are free of such restrictions. We demonstrate that the lockup creates a price discount relative to stock value implied by warrants. We show that the discount decreases throughout the trading day and that investors tend to purchase stocks when the lockup becomes less binding. The paper provides implications to value illiquid assets.

This paper first studies the Chinese warrant market that has been developing since August 2005. Empirical evidence shows that the market prices of warrants are much higher systematically than the Black-Scholes prices with historical volatility. The prices of a warrant and its underlying asset do not support the monotonicity, perfect correlation and option redundancy properties. The cumulated delta-hedged gains for almost all expired warrants are negative. The negative gains are mainly driven by the volatility risk, and the trading values of the warrants for puts and the market risk for calls. The investors are trading some other risks in addition to the underlying risk.

China launched her warrant market in August 2005 in the split share structure reform of listed companies. As up to now, equity trading on margin and short-sale of any form are still prohibited in China. This warrant market enables investors to trade on information that otherwise might be prohibitively expensive to trade on. The Chinese warrant market created top trading volume and turnover with only a handful of different warrants traded. This paper first studies the Chinese warrant market. Empirical evidence shows that the market prices of warrants are much higher systematically than the Black-Scholes prices with historical volatility. Moreover, the paper documents ample evidence that the one-dimensional diffusion model does not apply well in the Chinese warrant market. The prices of a warrant and its underlying asset do not support the monotonicity, perfect correlation and option redundancy properties. The paper also studies the cumulated gains of a delta-hedged warrant portfolio. In the Chinese warrant market, the cumulated delta-hedged gains for almost all expired warrants are negative. The negative gains are mainly driven by the volatility risk, and the trading values of the warrants for puts and the market risk for calls. The investors are trading some other risks in addition to the underlying risk.

This paper investigates the volatility and turnover effects of underlying stocks associated with the introduction of warrants in China’s warrants market. We find that in a derivative market where noise traders dominate, the introduction of warrants increases the underlying stock’s volatility, which cannot be attributed to better information revelation. We also find that speculation on derivatives has a spillover effect on the underlying security. Higher volatility and turnover rate of underlying stocks are associated with higher warrants turnover, larger warrants price deviation from theoretical prices, and longer time to maturity of warrants. Additionally, we find that stocks with covered warrants have higher volatility and turnover than those with only equity warrants. Our paper provides new evidence for the impact of derivatives on underlying assets in the emerging market context.

In 2005-08, over a dozen put warrants traded in China went so deep out of the money that they were certain to expire worthless. Nonetheless, these warrants attracted a speculative frenzy: for each warrant, billions of Yuan traded with an average daily turnover rate close to 300%, and at substantially inflated prices. The publicly observable underlying stock prices make the zero warrant fundamentals common knowledge to all market participants. This warrants bubble thus presents a unique opportunity to study bubble mechanisms, so far only available in laboratory environments. We find evidence supporting the resale option theory of bubbles: investors overpay for a warrant hoping to resell it at an even higher price to a greater fool.

This paper explores whether the pricing of the option-type derivative is affected by some of fundamental characteristics, such as size and liquidity of the derivative itself and the underlying asset, which are not involved in the standard pricing theory. Considering the unique status of warrants in China due to the relatively more flexible trading mechanism, I empirically examine the pricing of Chinese covered warrants to develop this study. Empirical results show that market prices of Chinese warrants are significantly higher than theoretical prices predicted by traditional pricing models such as Black-Scholes, Jump-Diffusion, and CEV model. For call warrants, about 25 percent of the market price can not be explained by pricing models, and this figure rises to over 60 percent for put warrants. Further regression tests show that both size and liquidity of warrants and underlying stocks significantly affect warrant pricing errors. The way in which the size and liquidity affect the pricing error depends on the type of warrants. In addition, it is evident that movements of put warrant prices in China do not follow movements of stock prices. To explain the above pricing puzzles,the concept of functional asset pricing is proposed. According to this concept, these pricing puzzles just reflect the existence of functional value of financial instruments that has long been neglected by traditional pricing models. In fact, Due to the high level of liquidity and popularity, the Chinese warrant may well function as a good tool for obtaining short-term profits. The pricing of Chinese warrants by the market may correctly re°ect the value of this function, and thus is rational in essence.