Open AccessThe Demand Function for Bank-Issued Warrants
Author(s) -
Rainer Baule,
Philip Blonski
Publication year - 2015
Publication title -
applied finance letters
Language(s) - English
Resource type - Journals
eISSN - 2253-5802
pISSN - 2253-5799
DOI - 10.24135/afl.v4i1and2.28
Subject(s) - business , monetary economics , function (biology) , product (mathematics) , demand curve , derivative (finance) , face (sociological concept) , economics , financial economics , finance , microeconomics , geometry , mathematics , evolutionary biology , biology , social science , sociology
Bank-issued warrants are securitized options which are particularly designed to give smaller individual investors the opportunity to participate in the derivative markets. As banks incorporate potentially different margins on top of the theoretical fair values of the products, investors face the problem of choosing an optimal product. While previous literature has characterized individual investors as “noise traders”, this paper finds that they do act pricesensitively. In particular, we provide evidence that demand decreases with increasing margins, but also show that larger investors still realize lower margins than smaller investors.