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Prices of derivative warrants considering their market characteristics and short-selling costs of underlying assets

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  • Bae, Kwangil
  • Lee, Soonhee

Abstract

We theoretically explain the empirical findings for prices of derivative warrants (DWs). For this, we consider the short-selling costs of underlying assets and the different features of DW such as unavailability of net short positions and existence of a liquidity provider. Accordingly, we explain the similarities and differences between DWs and options. The similarities include that the relative bid–ask spreads increase when the short-selling costs increase or the moneyness becomes out of the money. The differences include that DW prices tend to be higher than option prices and that the bid–ask spreads of DWs can be narrower than those of options.

Suggested Citation

  • Bae, Kwangil & Lee, Soonhee, 2022. "Prices of derivative warrants considering their market characteristics and short-selling costs of underlying assets," Finance Research Letters, Elsevier, vol. 45(C).
  • Handle: RePEc:eee:finlet:v:45:y:2022:i:c:s154461232100249x
    DOI: 10.1016/j.frl.2021.102177
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    More about this item

    Keywords

    Short-selling cost; Derivative warrants; Options; Bid–ask spread;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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