Pricing Warrants: An Empirical Study of the Black-Scholes Model and Its Alternatives

Beni Lauterbach and Paul Schultz

Journal of Finance, 1990, vol. 45, issue 4, 1181-209

Abstract: 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 F. Black and M. 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. The authors show that more accurate price forecasts are obtained with a specific form of the constant elasticity of variance model. Copyright 1990 by American Finance Association.

Date: 1990
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