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Pricing Warrants: An Empirical Study of the Black-Scholes Model and Its Alternatives

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  • Lauterbach, Beni
  • Schultz, Paul
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    Abstract

    This paper uses a sample of over 25,000 daily warrant prices to empirically investigate potential problems with the commonly used warrant pricing model proposed by F. Black and M. Scholes as an extension of their call option model. One problem seems to be especially important: the constant variance assumption of the dilution adjusted Black-Scholes model appears to cause biases in model prices for almost all warrants and over the entire sample period. The authors show that more accurate price forecasts are obtained with a specific form of the constant elasticity of variance model. Copyright 1990 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 45 (1990)
    Issue (Month): 4 (September)
    Pages: 1181-209

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    Handle: RePEc:bla:jfinan:v:45:y:1990:i:4:p:1181-209

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    Cited by:
    1. Xiao, Weilin & Zhang, Weiguo & Zhang, Xili & Chen, Xiaoyan, 2014. "The valuation of equity warrants under the fractional Vasicek process of the short-term interest rate," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 394(C), pages 320-337.
    2. Darsinos, T. & Satchell, S.E., 2002. "On the Valuation of Warrants and Executive Stock Options: Pricing Formulae for Firms with Multiple Warrants/Executive Options," Cambridge Working Papers in Economics 0218, Faculty of Economics, University of Cambridge.
    3. Xiao, Wei-Lin & Zhang, Wei-Guo & Yao, Zheng & Wang, Xiao-Hui, 2013. "The impact of issuing warrant and debt on behavior of the firm's stock," Economic Modelling, Elsevier, vol. 31(C), pages 635-641.
    4. Xiao, Wei-Lin & Zhang, Wei-Guo & Zhang, Xili & Zhang, Xiaoli, 2012. "Pricing model for equity warrants in a mixed fractional Brownian environment and its algorithm," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6418-6431.
    5. Kung, James J. & Lee, Lung-Sheng, 2009. "Option pricing under the Merton model of the short rate," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 80(2), pages 378-386.
    6. Suchard, Jo-Ann, 2005. "The use of stand alone warrants as unique capital raising instruments," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1095-1112, May.
    7. Veld, C.H. & Verboven, A.H.F., 1993. "An empirical analysis of warrant prices versus long term call option prices," Research Memorandum 594, Tilburg University, Faculty of Economics and Business Administration.
    8. Darsinos, T. & Satchell, S.E., 2002. "The Implied Distribution for Stocks of Companies with Warrants and/or Executive Stock Options," Cambridge Working Papers in Economics 0217, Faculty of Economics, University of Cambridge.
    9. Xiao, Weilin & Zhang, Weiguo & Xu, Weijun & Zhang, Xili, 2012. "The valuation of equity warrants in a fractional Brownian environment," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(4), pages 1742-1752.
    10. Wu, Xin-Yu & Ma, Chao-Qun & Wang, Shou-Yang, 2012. "Warrant pricing under GARCH diffusion model," Economic Modelling, Elsevier, vol. 29(6), pages 2237-2244.

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