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Is There a Novelty Premium on New Financial Instruments? The Argentine Experience with GDP-Indexed Warrants

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Author Info
Marcos Chamon
Alejo Costa
Luca Antonio Ricci

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Abstract

This paper examines the Argentine experience with GDP-indexed warrants in order to gauge the existence of a novelty premium on new financial instruments. It develops a Monte Carlo pricing exercise to calculate the expected net present value of payments, on the basis of various forecast assumptions. The results show that the residual premium paid by these warrants over standard bonds declined significantly by about 600 basis points between December 2005 and July 2007. This suggests that financial innovation may be associated with premia, which decay reasonably fast.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/109.

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Length: 40 pages
Date of creation: 01 May 2008
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Handle: RePEc:imf:imfwpa:08/109

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Keywords: Working Paper ; Financial instruments ; Argentina ; Bonds ; Insurance ; Economic models ;

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  1. Chamon, Marcos & Mauro, Paolo, 2006. "Pricing growth-indexed bonds," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3349-3366, December. [Downloadable!] (restricted)
    Other versions:
  2. Stephany Griffith-Jones & Krishnan Sharma, 2006. "GDP-Indexed Bonds: Making It Happen," Working Papers 21, United Nations, Department of Economics and Social Affairs. [Downloadable!]
  3. Enrique Schroth, 2006. "Innovation, Differentiation, and the Choice of an Underwriter: Evidence from Equity-Linked Securities," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 19(3), pages 1041-1080. [Downloadable!] (restricted)
  4. Brorsen, B. Wade & Fofana, N'Zue F., 2001. "Success And Failure Of Agricultural Futures Contracts," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 19(2). [Downloadable!]
  5. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR, CES, MSH, vol. 19(38), pages 165-216, 04. [Downloadable!] (restricted)
  6. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April. [Downloadable!] (restricted)
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  8. W. Scott Frame & Lawrence J. White, 2004. "Empirical Studies of Financial Innovation: Lots of Talk, Little Action?," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 116-144, March. [Downloadable!] (restricted)
  9. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund. [Downloadable!]
  10. Marcos Chamon & Eduardo Borensztein & Olivier Jeanne & Paolo Mauro & Jeromin Zettelmeyer, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
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