Warrant pricing: a review of empirical research

Veld, Chris

doi:10.1080/13518470110047648

Cited by 16 publications

(3 citation statements)

References 55 publications

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“…This valuation formula is known in the warrant literature as the classical warrant formula or the "correct warrant valuation model" (Veld 2003). The main obstacle to the application of this formula is that it depends on the value of the rm, � � , and on its instantaneous volatility, � � , which are not observable.…”

Section: The Black-scholes Model Applied To the Value Of The Rmmentioning

confidence: 99%

Black-scholes approximation of warrant prices: slight return in a low interest rate environment

Bertrand

2022

Ann Oper Res

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The objective of this paper is to emphasize the di¤erences between a call and a warrant as well as the di¤erent valuation methods of warrants which have been introduced in the nancial literature. For the sake of simplicity and applicability, we only consider a debt-free equitynanced rm. More recently a formal distinction between structural and reduced form pricing models has been introduced. This distinction is important whether one wishes to price a new warrant issue or outstanding warrants. If we are interested in pricing a new issue of warrants, e.g. in the context of a management incentive package, one has to rely on a structural model. However most of practitioners use the simple Black-Scholes formula. In this context, we analyze the accuracy of the approximation of the "true" price of a warrant by the Black-Scholes formula. We show that in the current low interest rate environment, the quality of the approximation deteriorates and the sensitivity of this approximation to the volatility estimate increases.

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Section: The Black-scholes Model Applied To the Value Of The Rmmentioning

confidence: 99%

Black-scholes approximation of warrant prices: slight return in a low interest rate environment

Bertrand

2022

Ann Oper Res

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“…Nevertheless, the accuracy and reliability of Black Scholes model is doubtful, as it follows certain over simplified assumptions such as constant volatility and constant interest rates [4]. Veld [5] claimed that most of the scholars that worked on warrants evoked with this model, and several changes were made to this model to suit the specific warrant features. Despite the fact that the Black Scholes model was well known to investors, it could not be applied to the real-life circumstances [6].…”

Section: The Black Scholes Modelmentioning

confidence: 99%

A Comprehensive Literature Review on Pricing Equity Warrants Using Stochastic Approaches

Ibrahim¹,

Roslan²,

Jameel³

2021

ujaf

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Prior studies revealed that most researchers tend to employ the Black Scholes model to price equity warrants. However, the Black Scholes model was found deficient by contributing to large estimation errors and mispricing of equity warrants. Therefore, issues involving equity warrants are discussed in this paper, by focusing on specific topics and respective stochastic models to provide a basis for improvements in future research. In recent years, stochastic approaches have been used to a great extent among researchers due to the expansive applications in both theoretical and practical sense. Subsequently, this paper provides the results of a comprehensive literature review on various stochastic modelling methods and its applications for pricing financial derivatives in terms of applications, modifications of methods, comparisons with other methods, and general related researches. Focus is given on two types of stochastic models namely stochastic volatility and stochastic interest rate models, along with the discussions associating these two types of models. This paper acts as a valuable source of information for academic researchers and practitioners not only for pricing financial instruments, but also in various other fields involving stochastic techniques.

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“…The author adjusts for the payment of dividends with the option pricing model of Merton (1973). Veld (2003) argues that Merton (1973) performs as well as any other pricing model in studies of warrant pricing. Warrant exercise increases the number of shares outstanding.…”

Section: Valuation Methodsmentioning

confidence: 99%

'The Biggest Warrant Auction in U.S. History'

Wilson

2009

SSRN Journal

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On December 10, 2009, the auction of JP Morgan Chase's warrants raised gross proceeds of $950 million, topping the previous warrant auction record of the 1983 Chrysler warrants in real and nominal terms. This paper analyzed the results from the secondary market trading on December 9, 2009, of the Troubled Asset Relief Program (TARP) warrants issued by Capital One Financial (COF) to estimate the likely auction price of the JP Morgan Chase (JPM) TARP warrants. The Capital One Financial warrants have displayed an implied volatility discount relative to other historic and implied volatility metrics. The paper translates the percent volatility discounts from traded TARP warrants to estimate the likely implied volatility of long-dated TARP warrants that have not yet gone to auction.

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Warrant pricing: a review of empirical research

Cited by 16 publications

References 55 publications

Black-scholes approximation of warrant prices: slight return in a low interest rate environment

Black-scholes approximation of warrant prices: slight return in a low interest rate environment

A Comprehensive Literature Review on Pricing Equity Warrants Using Stochastic Approaches

'The Biggest Warrant Auction in U.S. History'

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