IDEAS home Printed from https://ideas.repec.org/a/pjm/journl/vxiiiy2008i2p161-192.html
   My bibliography  Save this article

Dilution and Dividend Effects on the Portuguese Equity Warrants Market

Author

Listed:
  • José Eduardo Correia

    (CEFAGE - UE, Management Department, Évora University, Portugal)

  • João Duque

    (Advance Research Center, School of Economics and Management (ISEG) - Technical University of Lisbon, Portugal)

Abstract

The aim of this study is to analyse the impact of dilution and dividends on the goodness of fit of warrant pricing valuation models, to the Portuguese warrants market. In order to avoid modelling bias over the research design, and to test dividend and dilution effects we decided to keep this empirical research under the Black-Scholes framework. Therefore, four pricing models were used: the original Black-Scholes model and three derivations. Using these four models we empirically estimate values for actual warrant prices, computing the mean percentage error for each (the difference between model prices and market prices). We found that the original Black-Scholes model when adjusted to account for dilution as well as for dividends works best in the Portuguese market. The analysis uses data collected from the Euronext - Lisbon, between 1998 and 2000.

Suggested Citation

  • José Eduardo Correia & João Duque, 2008. "Dilution and Dividend Effects on the Portuguese Equity Warrants Market," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(2), pages 161-192.
    • Handle: RePEc:pjm:journl:v:xiii:y:2008:i:2:p:161-192
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    References listed on IDEAS

    as
    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. Chen, Andrew H Y, 1970. "A Model of Warrant Pricing in a Dynamic Market," Journal of Finance, American Finance Association, vol. 25(5), pages 1041-1059, December.
    3. Geske, Robert, 1981. "Comments on Whaley's note," Journal of Financial Economics, Elsevier, vol. 9(2), pages 213-215, June.
    4. Constantinides, George M., 1984. "Warrant exercise and bond conversion in competitive markets," Journal of Financial Economics, Elsevier, vol. 13(3), pages 371-397, September.
    5. Geoffrey Loudon & Kien Nguyen, 2006. "Evidence on the issuer effect in warrant overpricing," Applied Financial Economics, Taylor & Francis Journals, vol. 16(3), pages 223-232.
    6. Wei, Jason Z, 1995. "Empirical Tests of the Pricing of Nikkei Put Warrants," The Financial Review, Eastern Finance Association, vol. 30(2), pages 211-241, May.
    7. Geske, Robert, 1979. "A note on an analytical valuation formula for unprotected American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 7(4), pages 375-380, December.
    8. Chris Veld, 2003. "Warrant pricing: a review of empirical research," The European Journal of Finance, Taylor & Francis Journals, vol. 9(1), pages 61-91.
    9. Schulz, G. Uwe & Trautmann, Siegfried, 1994. "Robustness of option-like warrant valuation," Journal of Banking & Finance, Elsevier, vol. 18(5), pages 841-859, October.
    10. Emanuel, David C., 1983. "Warrant valuation and exercise strategy," Journal of Financial Economics, Elsevier, vol. 12(2), pages 211-235, August.
    11. Shastri, Kuldeep & Sirodom, Kulpatra, 1995. "An empirical test of the BS and CSR valuation models for warrants listed in Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 3(4), pages 465-483, December.
    12. Galai, Dan & Schneller, Meir I, 1978. "Pricing of Warrants and the Value of the Firm," Journal of Finance, American Finance Association, vol. 33(5), pages 1333-1342, December.
    13. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    14. Bierman, Harold, 1973. "The Cost of Warrants," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(3), pages 499-503, June.
    15. Whaley, Robert E., 1981. "On the valuation of American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 9(2), pages 207-211, June.
    16. Lauterbach, Beni & Schultz, Paul, 1990. "Pricing Warrants: An Empirical Study of the Black-Scholes Model and Its Alternatives," Journal of Finance, American Finance Association, vol. 45(4), pages 1181-1209, September.
    17. Huang, Yu Chuan & Chen, Shing Chun, 2002. "Warrants pricing: Stochastic volatility vs. Black-Scholes," Pacific-Basin Finance Journal, Elsevier, vol. 10(4), pages 393-409, September.
    18. Noreen, E & Wolfson, M, 1981. "Equilibrium Warrant Pricing-Models And Accounting For Executive Stock-Options," Journal of Accounting Research, Wiley Blackwell, vol. 19(2), pages 384-398.
    19. João L. C. Duque & Patrícia Teixeira Lopes, 2003. "Maturity and volatility effects on UK smiles," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 2(3), pages 173-193, December.
    20. 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.
    21. David C. Leonard & Michael E. Solt, 1990. "On Using The Black-Scholes Model To Value Warrants," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(2), pages 81-92, June.
    22. repec:bla:jfinan:v:43:y:1988:i:2:p:493-506 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Veld, C.H., 1991. "Warrant pricing : A review of theoretical and empirical research," Other publications TiSEM ac252bad-d1c0-45d6-832a-f, Tilburg University, School of Economics and Management.
    2. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    3. Darsinos, T. & Satchell, S.E., 2002. "On the Valuation of Warrants and Executive Stock Options: Pricing Formulae for Firms with Multiple Warrants/Executive Options," Cambridge Working Papers in Economics 0218, Faculty of Economics, University of Cambridge.
    4. Michael Hanke & Klaus Pötzelberger, 2002. "Consistent pricing of warrants and traded options," Review of Financial Economics, John Wiley & Sons, vol. 11(1), pages 63-77.
    5. Hanke, Michael & Potzelberger, Klaus, 2002. "Consistent pricing of warrants and traded options," Review of Financial Economics, Elsevier, vol. 11(1), pages 63-77.
    6. Xiao, Wei-Lin & Zhang, Wei-Guo & Yao, Zheng & Wang, Xiao-Hui, 2013. "The impact of issuing warrant and debt on behavior of the firm's stock," Economic Modelling, Elsevier, vol. 31(C), pages 635-641.
    7. Frans De Roon & Chris Veld, 1996. "An empirical investigation of the factors that determine the pricing of Dutch index warrants," European Financial Management, European Financial Management Association, vol. 2(1), pages 97-112, March.
    8. Xiao, Wei-Lin & Zhang, Wei-Guo & Zhang, Xili & Zhang, Xiaoli, 2012. "Pricing model for equity warrants in a mixed fractional Brownian environment and its algorithm," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6418-6431.
    9. Darsinos, T. & Satchell, S.E., 2002. "The Implied Distribution for Stocks of Companies with Warrants and/or Executive Stock Options," Cambridge Working Papers in Economics 0217, Faculty of Economics, University of Cambridge.
    10. David C. Leonard & Michael E. Solt, 1990. "On Using The Black-Scholes Model To Value Warrants," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(2), pages 81-92, June.
    11. Xiao, Weilin & Zhang, Xili, 2016. "Pricing equity warrants with a promised lowest price in Merton’s jump–diffusion model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 219-238.
    12. Shastri, Kuldeep & Sirodom, Kulpatra, 1995. "An empirical test of the BS and CSR valuation models for warrants listed in Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 3(4), pages 465-483, December.
    13. Carlos Miguel Glória & José Carlos Dias & Aricson Cruz, 2024. "Pricing levered warrants under the CEV diffusion model," Review of Derivatives Research, Springer, vol. 27(1), pages 55-84, April.
    14. Xiao, Weilin & Zhang, Weiguo & Zhang, Xili & Chen, Xiaoyan, 2014. "The valuation of equity warrants under the fractional Vasicek process of the short-term interest rate," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 394(C), pages 320-337.
    15. Xiao, Weilin & Zhang, Weiguo & Xu, Weijun & Zhang, Xili, 2012. "The valuation of equity warrants in a fractional Brownian environment," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(4), pages 1742-1752.
    16. Ter Horst, J.R. & Veld, C.H., 2002. "Behavioral Preferences for Individual Securities : The Case for Call Warrants and Call Options," Discussion Paper 2002-95, Tilburg University, Center for Economic Research.
    17. Jenke ter Horst & Chris Veld, 2008. "An Empirical Analysis of the Pricing of Bank Issued Options versus Options Exchange Options," European Financial Management, European Financial Management Association, vol. 14(2), pages 288-314, March.
    18. Veld, C.H. & Verboven, A.H.F., 1993. "An empirical analysis of warrant prices versus long term call option prices," Research Memorandum FEW 594, Tilburg University, School of Economics and Management.
    19. Mondher Bellalah, 2009. "Derivatives, Risk Management & Value," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7175, August.
    20. Roland Mallier & Ghada Alobaidi, 2000. "Laplace transforms and American options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 7(4), pages 241-256.

    More about this item

    Keywords

    Warrants; implied volatility; Black-Scholes Model; dilution effect; Portuguese market.;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pjm:journl:v:xiii:y:2008:i:2:p:161-192. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Luís Mota de Castro, Tiago Cardão-Pito, Mark Crathorne (email available below). General contact details of provider: https://edirc.repec.org/data/isutlpt.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.