The Pricing of Japanese Equity Warrants
Hiroto Kuwahara, Terry A. Marsh
Management Science · 1992 · Volume 38 · Issue 11
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
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