The link between intraday signals and call warrant mispricing

Abstract

This study proposes a linkage between intraday variables (signal amounts and signal duration) and the mispricing of Taiwan call warrant prices, based on the lower boundary condition of Merton [1973. Theory of rational option pricing. Bell Journal of Economics and Management Science, 4(1), 141-183] as modified by Galai [1978. Empirical tests of boundary conditions for CBOE options. Journal of Financial Economics, 9(2), 321-346]. Trading mispriced call warrants associated with a riskless hedging strategy over the period January 2004-December 2005 on average produces abnormal profits after taking into account transaction costs, as indicative of an inefficient market.