Pricing Warrants Models: An Empirical Study of the Indonesian Market
Abstract
The main issue during periods of financial crisis is to restore the investor’s confidence and attract them back to financial markets. Thus, the warrants have been a great help to relaunch many south East Asian financial markets just after the 1997 crisis, by encouraging investors to finance the restructuring of troubled companies. However, the few empirical studies which were interested in this product, was limited to the developed markets and in particular the American one. In this paper, we will try to emphasize the warrant’s specificities compared to the option ones. Then, we will seek to release the ideal model ready to provide the best pricing for this product. The comparison will relate to 3 models: the Black and Sholes model (BS), the Dilution Adjusted Black and Scholes model (DABS) and finally the modified Square Root Constant Elasticity of Variance (SRCEV) adjusted by the dilution effect. The empirical study, which is spread out over 3 years (2001–2003), will relate to an emergent market: the Jakarta Stock Exchange (JSX)References
Bates, D. (1995). “Testing Option Pricing Models”. Working paper. National Bureau of Economis Research.
Bates, D. (1996). “Jumps and stochastic volatility: Exchange rate processes implicit in Deutsche Mark options”. Review of Financial Studies, pp. 69-107.
Beckers, S. (1980). “The constant elasticity of variance model and its implications for option pricing”. Journal of Finance, pp. 661-673.
Black, F and M. Scholes. (1973). “The pricing of options and corporate liabilities”. Journal of Political Economy, pp. 637-659.
Bensoussan, A., M. Grouhy and D. Galai. (1995). “Black-Scholes approximations of warrant prices”. Advances in Futures and Option Research, pp. 1-14.
Christoffersen, P. Jacobs, K. and Mimouni, K. (2006). “Models for S&P500 Dynamics: Evidence from Realized Volatility, Daily Returns, and Option Prices”. Working paper. Faculty of management, McGill University.
Crouhy, M. and D. Galai. (1991). “Warrant valuation and equity volatility”. Advances in Futures and Options Research, pp. 203-215.
Cox, J. (1975). “Notes on option pricing : Constant elasticity of variance diffusions”. Working Paper. Stanford University.
Cox, J. (1996). “The constant elasticity of variance option pricing model”. Journal of Portfolio Management, pp. 15-17.
Galai, D. and M. Schneller (1978). “Pricing warrants and the value of the firm”. Journal of Finance, pp. 1339-1342.
Hauser, S. and B. Lauterbach. (1996). “Tests of warrant pricing models: the trading profits perspective”. Journal of Derivatives, pp. 71-79.
Hauser, S. and B. Lauterbach. (1997). “The relative performance of five alternative warrant pricing models”. Financial Analysts Journal, pp. 55-61.
Hsu, L. Lee, C. and Lin, T. (2007). “Constant elasticity of variance (CEV) option pricing model: integration and detailed derivation”. Mathematics and computers simulation.
Hull, J. and A. White. (1987). “The pricing of options on assets with stochastic volatilities”. Journal of Finance, pp. 281-300.
Jacquier, E., Polson, N.G and Rossi, P.E. (2001). “Bayesian analysis of stochastic volatility with leverage effect and fat tails”. Journal of Econometrics, forthcoming.
Jones, C. (2003). “The dynamics of stochastic volatility: evidence from underlying and options markets”. Journal of econometrics, pp. 181-224.
Latane, H. and R. Rendleman (1976). “Standard deviations of stock price ratios implied in option prices”. Journal of Finance, pp. 369-382.
Lauterbah, B. and P. Schultz (1990). “Pricing warrants: an empirical study of the Black-Scholes model and its altenatives”. Journal of Finance, pp. 1181-1209.
Lee, C. and T. Wu. (2002). “The constant elasticity of variance models: New evidence from S&P 500 index options”. Working paper. Rutgers Business School.
Longstaff, F. (1990). “Pricing options with extendible maturities: Analysis and applications”. Journal of Finance, pp. 935-957.
Macbeth, J. and L. Merville (1979). “An empirical examination of the Black-Scholes call option pricing model”. Journal of finance, pp. 1173-1186.
Macbeth, J. and L. Merville (1980). “Tests of the Black-Scholes and Cox call option valuation models”. Journal of Finance, pp. 285-300.
Pan, J., (2002). “The jump-risk premia implicit in options: evidence from an integrated time-series study”. Journal of Financial Econometrics 63, pp. 3–50.
Ritchken, P. (1987). “Option: Theory, Strategy and Applications”. Glenview, IL: Scott, Foresman and Company.
Schulz, G. and S. Trautman (1994). “Robustness of option-like warrant valuation”. Journal of Banking and Finance, pp. 841-859.
Scott, L. (1987). “Option pricing when the variance changes randomly: Theory, Estimation and Application”. Journal of Financial and Quantitaive Analysis, pp. 419-438.
Skiadopoulos, G., (2000). “Volatility smile consistent option models: a survey”. International Journal of Theoretical and Applied Finance 4, 403–437.
Suresh M. (2000). “Continuous-Time Methods in Finance: A Review and an Assessment”. The Journal of Finance, Vol. 55, No. 4, , pp. 1569-1622.
Sutthist, J. and Cornel, A (2007). “Long memory options: LM evidence and simulation”. Research in International Business and Finance, pp. 260-280.
Tompkins, R.G., (2001). “Implied volatility surfaces: uncovering regularities for options on financial futures”. The European Journal of Finance 7, 198–230.
Whaley, R. (1982). “Valuation of American call options on dividend paying stocks: Empirical tests”. Journal of Financial Economics, pp. 29-58.
Yang, H. (1999). “Estimation in the constant elasticity of variance model”.Working paper. University of Hong Kong.
Yu, C. and Shing, C (2002). “Warrant pricing: Stochastic volatility vs. Black-Scholes”. Pacific Basin Finance Journal, pp. 393-409.
Copyright information
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License (Creative Commons Attribution License 3.0 - CC BY 3.0) that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
