Use this URL to cite or link to this record in EThOS:
Title: Equity warrant pricing - empirical evidence from Malaysia KLSE market
Author: Low, Buen Sin
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 2000
Availability of Full Text:
Access from EThOS:
An equity warrant gives the holder the right to buy a fixed number of underlying shares at a specified price before the warrant's maturity date. This is similar to call options. The similarities allow practitioners and researchers to adopt the Black-Scholes (BS) model developed by Black & Scholes (1973) to approximate the value of equity warrants. However, there are several features of equity warrants that differ from normal call options on shares. These features can have important implications on valuing warrants using the BS model. They include: • Potential dilution effect on share value and management control. • The long time to maturity of warrant at the time of issuance. This poses a challenge to a number of assumptions in the BS model, specifically the assumption of constant instantaneous volatility, constant risk-free interest rate and a perfect knowledge of the dividend size and the timing of ex-dividend date. This study focuses on two special aspects of equity warrant, i.e. its potential dilution effect on equity value and the potential impact of the long maturity period on the constant volatility assumption in warrant pricing. A warrant pricing model that incorporates a flexible stochastic volatility process on an equity return and adjusted for potential dilution effect was proposed. It is a model based on the stochastic volatility option pricing model derived by Hull & White (1988). The impact of potential dilution effect on the pricing error results from the use of the BS model to price equity warrants is studied. The necessity of incorporating a stochastic volatility and/or a stochastic interest rate process into the pricing model is then analysed. Empirical tests that compares the performance of several warrant pricing models - Simple BS Model, Dilution Adjusted BS Model, Free-9 Dilution Adjusted Constant Elasticity Variance Model and Dilution Adjusted Stochastic Volatility Model are carried out.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available