Behavioral Preferences for Individual Securities: The Case for Call Warrants and Call Options
AbstractSince 1998, large investment banks have flooded the European capital markets with issues of call warrants.This has led to a unique situation in the Netherlands, where now call warrants, traded on the stock exchange, and long-term call options, traded on the options exchange, exist.Both entitle their holders to buy shares of common stock.We use the long-term call options in order to price the call warrants.Using the model of Black and Scholes (1973), the Square Root model version of the Constant Elasticity of Variance model of Cox and Ross (1976), and the Binomial model of Cox et al.(1979) we find that the call warrants are strongly overvalued durin the first five tradin days.The average overvaluation is between 25 and 30 percent for all three models.Only a small part of this overvaluation can be explained by rational arguments such as transaction costs.We conclude that the overvaluation can be attributed to a behavioral preference of private investors for call warrants.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2002-95.
Date of creation: 2002
Date of revision:
Contact details of provider:
Web page: http://center.uvt.nl
securities; options; option pricing models;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-11-10 (All new papers)
- NEP-FIN-2002-11-10 (Finance)
- NEP-FMK-2002-11-10 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Beckers, Stan, 1980. " The Constant Elasticity of Variance Model and Its Implications for Option Pricing," Journal of Finance, American Finance Association, vol. 35(3), pages 661-73, June.
- Chan, Howard Wei-Hong & Pinder, Sean M., 2000. "The value of liquidity: Evidence from the derivatives market," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 483-503, July.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Veld, C.H., 1994. "Warrant pricing: A review of empirical research," Discussion Paper 1994-34, Tilburg University, Center for Economic Research.
- Owen A. Lamont & Richard H. Thaler, 2003.
"Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs,"
Journal of Political Economy,
University of Chicago Press, vol. 111(2), pages 227-268, April.
- Owen A. Lamont & Richard H. Thaler, 2001. "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs," NBER Working Papers 8302, National Bureau of Economic Research, Inc.
- Owen A. Lamont & Richard H. Thaler, . "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs," CRSP working papers 528, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- Galai, Dan, 1977. "Characterization of options," Journal of Banking & Finance, Elsevier, vol. 1(4), pages 373-385, December.
- Hirshleifer, David, 2001.
"Investor Psychology and Asset Pricing,"
5300, University Library of Munich, Germany.
- Shastri, Kuldeep & Sirodom, Kulpatra, 1995. "An empirical test of the BS and CSR valuation models for warrants listed in Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 3(4), pages 465-483, December.
- Sohnke M. Bartram & Frank R. Fehle, 2003. "Alternative Market Structures for Derivatives," Finance 0311007, EconWPA, revised 12 Dec 2003.
- Sohnke M. Bartram & Frank R. Fehle, 2003. "Competition among Alternative Option Market Structures: Evidence from Eurex vs. Euwax," Finance 0307005, EconWPA, revised 24 Jul 2003.
- Bartram, Sohnke M. & Fehle, Frank, 2007. "Competition without fungibility: Evidence from alternative market structures for derivatives," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 659-677, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).
If references are entirely missing, you can add them using this form.