Testing The Warrants Mispricing and Their Determinants: The Panel Data Models

Abstract

This paper empirically studied the impact of several variables such as moneyness, stock return, maturity, and volatility on the warrant mispricing. We selected 4 companies listed in Bursa Malaysia such as MHC Plantations Bhd, MKH Bhd, YFG Bhd, and UNISEM to investigate the mispricing of warrants. Subsequently, panel time series data employed with daily basis from 30 June 2010 until 30 June 2013. The Black-Scholes Option Pricing Model (BSOPM) used to determine the mispricing of warrant. Several panel data techniques employed in this study such as pooled-OLS, fixed effect model (FEM), and random effect model (REM). In turn, we found that FEM is well explained the determinants of warrant mispricing. Thus, empirical results suggest that moneyness, maturity, and volatility are positively and significantly explained the mispricing of warrant, while stock return does not give an impact toward the warrant mispricing. The BSOPM is consistently mispricing the warrant either in-the-money (ITM) or out-the money (OTM) warrants. The market is not efficient on the warrants traded for four companies observed

Do issuers affect derivative warrants overpricing? evidence of Thailand

“…The results also show a positive relationship between the overpricing level and time-to-maturity. This relationship is consistent with the findings of Loudon and Nguyen (2006) and Sakti and Qoyum (2017) that longer time-to-maturity increase that overpricing level of derivative warrant. The positive relationship may happen because derivative warrant is used for speculation.…”

“…The fourth determinant is maturity, the date that life of financial instrument ends. The findings of Loudon and Nguyen (2006) and Sakti and Qoyum (2017) show that maturity has positive relationship with the overpricing, implying that the longer maturity positively affects the warrant mispricing to increase while other literatures found an unclear relationship between maturity and the warrant mispricing. For instance, Fung and Zeng (2012) report that the longer time-to-maturity causes higher overpricing level for call derivative warrants and lower overpricing level for put derivative warrants.…”

“…Third, several papers reveal that moneyness has an influence on the overpricing of derivative warrants, but the direction of relationship is ambiguous. Loudon and Nguyen (2006), Veld (2008), andSakti andQoyum (2017) provide the evidence that moneyness is negatively related to derivative warrant overpricing. In contrast, Chen et al (2014) report a positive relationship between moneyness and pricing error, consistent with smile effect that if the at-the-money warrants are closer to the outof-money side, warrant pricing will go down (a smirk effect).…”

“…The findings indicate that the 3 option pricing models provide the similar results that call warrants are underpriced while put warrants are overpriced. In Malaysia, Sakti and Qoyum (2017) study factors that affect warrant mispricing in Malaysia by employing panel data analysis and natural logarithms of the actual price divided by theoretical price are used as a proxy of warrant mispricing. This study reveals that the market is inefficient on the warrant traded for 4 companies observed.…”

“…Volatility reflects a measure of price risk for hedging and speculation decisions. Loudon and Nguyen (2006) and Sakti and Qoyum (2017) indicate a positive relationship between current volatility and the degree of warrant mispricing. These may be described that higher volatility implies higher cost to keep delta-neutral.…”