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The Pricing of Japanese Equity Warrants

Author

Listed:
  • Hiroto Kuwahara

    (Investment Technology Department, New Japan Securities Co., Ltd., 3-11, Kanda-surugadai, Chiyoda-ku, Tokyo 101-03, Japan)

  • Terry A. Marsh

    (Walter A. Haas School of Business, University of California, Berkeley, California 94720)

Abstract

Discrepancies between the Black-Scholes value of Japanese equity warrants and their observed prices are explained in part by the stochastic volatility of changes in prices of the underlying stocks. We fit GARCH and EGARCH models to the stochastic volatility and briefly compare their performance to the CEV model. A hopscotch algorithm is used to value the warrants in the presence of the stochastic stock price volatility. The stochastic volatility-hopscotch warrant values still differ substantially from corresponding prices; in contrast, away-from-the-money short-term Nikkei 225 options valued with the same stochastic volatility models are close to observed prices. A regression model is used to fit the differences between warrant values and prices as a function of proxies for market impediments.

Suggested Citation

  • Hiroto Kuwahara & Terry A. Marsh, 1992. "The Pricing of Japanese Equity Warrants," Management Science, INFORMS, vol. 38(11), pages 1610-1641, November.
  • Handle: RePEc:inm:ormnsc:v:38:y:1992:i:11:p:1610-1641
    DOI: 10.1287/mnsc.38.11.1610
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    Citations

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    Cited by:

    1. Nelson, Daniel B. & Foster, Dean P., 1995. "Filtering and forecasting with misspecified ARCH models II : Making the right forecast with the wrong model," Journal of Econometrics, Elsevier, vol. 67(2), pages 303-335, June.
    2. Bollerslev, Tim & Ole Mikkelsen, Hans, 1999. "Long-term equity anticipation securities and stock market volatility dynamics," Journal of Econometrics, Elsevier, vol. 92(1), pages 75-99, September.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    4. Butler, J. S. & Schachter, Barry, 1996. "The statistical properties of parameters inferred from the black-scholes formula," International Review of Financial Analysis, Elsevier, vol. 5(3), pages 223-235.
    5. Nobuya Takezawa & Noriyoshi Shiraishi, 1998. "A Note on the Term Structure of Implied Volatilities for the Yen/U.S. Dollar Currency Option," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 5(3), pages 227-236, November.
    6. Douglas Stone & William T. Ziemba, 1993. "Land and Stock Prices in Japan," Journal of Economic Perspectives, American Economic Association, vol. 7(3), pages 149-165, Summer.
    7. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.

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