The Pricing of Japanese Equity Warrants

Hiroto Kuwahara and Terry A. Marsh
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Hiroto Kuwahara: Investment Technology Department, New Japan Securities Co., Ltd., 3-11, Kanda-surugadai, Chiyoda-ku, Tokyo 101-03, Japan
Terry A. Marsh: Walter A. Haas School of Business, University of California, Berkeley, California 94720

Management Science, 1992, vol. 38, issue 11, 1610-1641

Abstract: Discrepancies between the Black-Scholes value of Japanese equity warrants and their observed prices are explained in part by the stochastic volatility of changes in prices of the underlying stocks. We fit GARCH and EGARCH models to the stochastic volatility and briefly compare their performance to the CEV model. A hopscotch algorithm is used to value the warrants in the presence of the stochastic stock price volatility. The stochastic volatility-hopscotch warrant values still differ substantially from corresponding prices; in contrast, away-from-the-money short-term Nikkei 225 options valued with the same stochastic volatility models are close to observed prices. A regression model is used to fit the differences between warrant values and prices as a function of proxies for market impediments.

Keywords: Japanese equity warrants; option pricing; equity derivatives; stochastic volatility; GARCH models; EGARCH models; CEV model; Nikkei 225 options; London OTC warrant market; trading costs (search for similar items in EconPapers)
Date: 1992
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:38:y:1992:i:11:p:1610-1641

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