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New Warrant Issues Valuation with Leverage and Equity Model Errors

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  • Jean-Guy Simonato

Abstract

The empirical analysis of new warrant issues in the context of a structural model of the firm typically assumes the absence of debt and a perfect equity pricing model. We examine here an approach relaxing these two assumptions. The proposed approach develops simple analytical expressions for the prices of warrant, debt and equity in the presence of leverage. An empirical strategy, allowing for discrepancies between observed and theoretical equity prices, is then proposed to implement the model. Illustrations with two recent warrant issues are provided. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Jean-Guy Simonato, 2015. "New Warrant Issues Valuation with Leverage and Equity Model Errors," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(2), pages 247-272, April.
    • Handle: RePEc:kap:jfsres:v:47:y:2015:i:2:p:247-272
    DOI: 10.1007/s10693-013-0183-1
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    References listed on IDEAS

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    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
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    6. A. Bensoussan & M. Crouhy & D. Galai, 1995. "Stochastic equity volatility related to the leverage effect II: valuation of European equity options and warrants," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(1), pages 43-60.
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    8. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
    9. Andrey D. Ukhov, 2004. "Warrant Pricing Using Observable Variables," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(3), pages 329-339, September.
    10. Ronn, Ehud I & Verma, Avinash K, 1986. "Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, vol. 41(4), pages 871-895, September.
    11. Jin‐Chuan Duan, 1994. "Maximum Likelihood Estimation Using Price Data Of The Derivative Contract," Mathematical Finance, Wiley Blackwell, vol. 4(2), pages 155-167, April.
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    Cited by:

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    More about this item

    Keywords

    Warrants; Structural model; Leverage; Pricing model errors; C22; G1; G3;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance

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