Premium
The Demand for Warrants and Issuer Pricing Strategies
Author(s) -
Baule Rainer,
Blonski Philip
Publication year - 2015
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21703
Subject(s) - issuer , margin (machine learning) , warrant , moneyness , derivative (finance) , economics , business , financial economics , monetary economics , actuarial science , finance , computer science , machine learning
Abstract We develop a model for the demand of warrants by individual investors with regard to their sensitivity to issuer margins, defined as the relative overpricing with respect to the theoretical value. Based on an empirical data set we show that investors are relatively margin‐sensitive; that is, given similar warrants from different issuers or warrants with similar characteristics, investors tend to buy those with the lowest margin. Investors are, however, not absolutely margin‐sensitive; that is, demand is not influenced by the overall margin level. Our model suggests an equilibrium with different issuer pricing strategies for different warrants in such a situation. Consistent with the model's predictions, we find that issuers vary their pricing with the moneyness of a warrant. We thus give an explanation for the dependence of issuer margins on a product's moneyness, which has been documented in the literature for several retail derivative products. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:1195–1219, 2015