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Behavioral preferences for individual securities: : the case for call warrants and call options

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Author Info
Horst, J. ter
Veld, C. (Tilburg University, Center for Economic Research)

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Abstract

Since 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.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 95.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:200295

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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

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References listed on IDEAS
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.:
  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, 08. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring. [Downloadable!] (restricted)
  7. Galai, Dan, 1977. "Characterization of options," Journal of Banking & Finance, Elsevier, vol. 1(4), pages 373-385, December. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. 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. [Downloadable!]
  2. Sohnke M. Bartram & Frank R. Fehle, 2003. "Alternative Market Structures for Derivatives," Finance 0311007, EconWPA, revised 12 Dec 2003. [Downloadable!]
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