EMPIRICAL EXERCISE BEHAVIOR OF WARRANT HOLDERS AND ITS CONSEQUENCES FOR WARRANT VALUES

Christian Koziol ()
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Christian Koziol: Department of Finance, University of Mannheim, 68131 Mannheim, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2006, vol. 09, issue 02, 245-268

Abstract: In this paper, we analyze the exercise behavior of warrant holders and its impact on warrant values. For this purpose, we propose a parametric model to describing the exercise volume of warrants and calibrate it to exercise data of 40 warrants from the German market. We find that few too-early exercises but also a significant number of too-late exercises occur. This observed exercise behavior results in warrant values that are more than 3% below those under the optimal exercise strategy for at-the-money warrants and the differences are even much higher for in- and out-of-the-money warrants.

Keywords: Early exercise; late exercise; option pricing; transaction costs; Monte Carlo simulation (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024906003494

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