The Relation between Time Decay and Trading Activities in the Korean ELW Market

Facing negative values of theta, investors holding equity-linked warrants (ELWs) are essentially taking a position in which the value of the ELW decreases as time passes. Therefore, it is likely that investors tend to refrain from purchasing additional ELWs on the day immediately before a holiday. Using a sample of Korean ELWs, we find that trading volume and the money paid for the traded ELWs are significantly lower on pre-holidays as compared to other days. Our measures of trading activities include: (1) trading volume, (2) money trading volume, (3) net volume investors purchased from the LPs, and (4) net money paid to the LPs. All these measures of trading activities are significantly lower on pre-holidays than on other days. Our results are consistent with the predictions obtained when we assume investors are sensitive to time decay, i.e., decreasing time value of warrants over calendar time.