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AN EMPIRICAL ANALYSIS OF WARRANT PRICES VERSUS LONG‐TERM CALL OPTION PRICES
Author(s) -
Veld Chris,
Verboven Adri
Publication year - 1995
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1995.tb00897.x
Subject(s) - warrant , derivative (finance) , economics , management , classics , history , financial economics
This paper empirically investigates the pricing behavior of warrants. Based on the premise that warrants and long term call options are similar contracts with respect to the same underlying value, an empirical test is conducted which evaluates the difference between the implied standard deviation, measured for both contracts at the same time. In the case of Dutch warrants and long term call options (with maturities up to several years), this study reveals that warrants are considerably overvalued. Moreover, this overvaluation persists over the entire research period and does not appear to be attributable to possible market imperfections or institutional factors.