|
The financial market in Taiwanhas changed a lot for the latest two years mostly because of the spring up of derivative financial instruments. Among these newly developed financial commodities, warrants shock investors most because they provide excellent mechanisms for controlling risk and locking up resources at a relevant minimal fee. So this study tries to find a more proper pricing model to value warrant prices so as to provide a guide for the investors when making investment decision. After reviewing relevant literature on option pricing theory, we find that the quadratic approximation method and the binomial model are two better models valuing American options. Since warrants in Taiwan are American-style call options, this study decides to adopt these two models as pricing tolls. The target warrants are six first-issued single-stock ones. Study period covers from 1,9,''98 to 4,30,''98 Dividing the warrants into five groups according to the extent of moneyness, we measure the absolute pricing error and percentage pricing error between market prices and model prices. Then we use t-test to exam if these errors are significant and compare the performance of the two models. In addition, we adopt two methods to estimate the volatility, simple historical s.d. and simple implied s.d.. One can observe the performance of the two methods simultaneously. The experimental results are: 1. No matter applying historical volatility or implied volatility , the binomial model generates smaller average absolute pricing and percentage pricing error than the quadratic approximation when valuing out-of-the-money warrants. But when pricing in-the-money warrants, the condition reverses. 2. The average absolute error and percentage pricing error of all the warrants drops dramatically after applying implied s.d. as the estimator of the volatility. 3. After dividing market price - model price by market price, the percentage pricing error for both models are much higher when dealing with valuing warrants with S/E <1.05 than that of warrants with S/E >=1.05. This is mostly because that the market prices of warrants with S/E<1.05 are much lower that those of warrants with S/E>=1.05. 4. Both models obviously underprice the value of warrants in Taiwan.
|