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Warrant price responses to credit spread changes: Fact or fiction?

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  • Andrea Schertler
  • Saskia Stoerch

Abstract

We use a new approach to analyze the relationship between warrant prices and issuers’ credit spreads. This approach allows us to gain insights into whether issuers use their credit risk systematically to increase their profits. In a post‐Lehman sample, we find strong support for a systematic use since issuers decrease prices less after cred it spread increases than they increase prices after credit spread decreases. Credit spread decreases are accompanied by price increases on several successive days. This sluggish adjustment in prices can be explained by the fact that retail investors’ purchase decisions depend on product prices.

Suggested Citation

  • Andrea Schertler & Saskia Stoerch, 2018. "Warrant price responses to credit spread changes: Fact or fiction?," Review of Financial Economics, John Wiley & Sons, vol. 36(3), pages 206-219, July.
    • Handle: RePEc:wly:revfec:v:36:y:2018:i:3:p:206-219
    DOI: 10.1016/j.rfe.2017.03.002
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    References listed on IDEAS

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