This paper examines the price and volume effects of underlying stocks around the announcement date of derivative warrants issued in Hong Kong. In general, the results indicate that underlying stocks are subject to extra buying pressure a few days before the new derivative warrant issuance, which is consistent with our hypothesis about the hedging effect created by the merchant banks that initiate the warrant issuance. Since the prices of underlying stocks peak on the first day after the warrant announcement and are stable thereafter, the information effect associated with the warrant issuance appears to be weak and does not last long. In addition, we find that underlying stocks have abnormal increases in price and volume during the last 5 minutes of trading on the warrant issuance day. This might be due to investors’ buying behavior precipitated by information leakage about the successful warrant issuance and/or to the price manipulation by merchant banks in order to attain a better payoff from the warrant issuing business.

Japanese stock returns are even more closely related to their book‐to‐market ratios than are their U.S. counterparts, and thus provide a good setting for testing whether the return premia associated with these characteristics arise because the characteristics are proxies for covariance with priced factors. Our tests, which replicate the Daniel and Titman (1997) tests on a Japanese sample, reject the Fama and French (1993) three‐factor model, but fail to reject the characteristic model.