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Pricing Warrants: An Empirical Study of the Black‐Scholes Model and Its Alternatives
Author(s) -
LAUTERBACH BENI,
SCHULTZ PAUL
Publication year - 1990
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1990.tb02432.x
Subject(s) - warrant , black–scholes model , econometrics , variance (accounting) , constant (computer programming) , economics , sample (material) , valuation of options , mathematics , financial economics , computer science , volatility (finance) , chemistry , accounting , chromatography , programming language
This paper uses a sample of over 25,000 daily warrant prices to empirically investigate potential problems with the commonly used warrant pricing model proposed by Black and Scholes as an extension of their call option model. One problem seems to be especially important: the constant variance assumption of the dilution adjusted Black‐Scholes model appears to cause biases in model prices for almost all warrants and over the entire sample period. We show that more accurate price forecasts are obtained with a specific form of the constant elasticity of variance model.