Issuers’ credit risk and pricing of warrants in the recent financial crisis

Andrea Schertler and Saskia Stoerch

Journal of Risk Finance, 2015, vol. 16, issue 4, 444-462

Abstract: Purpose - – The purpose of this paper is to investigate whether factor sensitivities of margins of bank-issued warrants depend on issuers’ credit risk during the period of economic turmoil between January 2008 and June 2010. Design/methodology/approach - – Therefore, first, Fama–MacBeth estimations were applied and it was demonstrate that the sensitivities of margins in terms of time to maturity and moneyness vary substantially over time; the average outcomes are similar to the results of classical pooled estimations. Findings - – Then, time-series tests were used and it was found that the steepness of the issuers’ credit default swap (CDS) spread curves correlates negatively with the time-to-maturity sensitivities as well as with the explanatory power of Fama–MacBeth estimations. Research limitations/implications - – These findings indicate that the life-cycle hypothesis is weakened when the issuers’ CDS spread curves become steeper. Originality/value - – Thus, this study offers a new approach to gain insights into the role of issuers’ credit risk on price setting behavior.

Keywords: Crisis; Credit spread curve; Fama–MacBeth estimations; Warrants (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:jrf-12-2014-0174

DOI: 10.1108/JRF-12-2014-0174

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