Is There a Novelty Premium on New Financial Instruments? The Argentine Experience with GDP-Indexed Warrants

Chamon, Marcos; Costa, Alejo; Ricci, Luca A.

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Is There a Novelty Premium on New Financial Instruments? The Argentine Experience with GDP-Indexed Warrants

IMF Working Paper No. 08/109

42 Pages Posted: 1 Jul 2008

See all articles by Marcos Chamon

Marcos Chamon

International Monetary Fund (IMF) - Research Department

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

Date Written: May 2008

Abstract

This paper examines the Argentine experience with GDP-indexed warrants in order to gauge the existence of a novelty premium on new financial instruments. It develops a Monte Carlo pricing exercise to calculate the expected net present value of payments, on the basis of various forecast assumptions. The results show that the residual premium paid by these warrants over standard bonds declined significantly by about 600 basis points between December 2005 and July 2007. This suggests that financial innovation may be associated with premia, which decay reasonably fast.

Keywords: Working Paper, Financial instruments, Argentina, Bonds, Insurance, Economic models

Suggested Citation: Suggested Citation

Chamon, Marcos and Costa, Alejo and Ricci, Luca Antonio, Is There a Novelty Premium on New Financial Instruments? The Argentine Experience with GDP-Indexed Warrants (May 2008). IMF Working Paper No. 08/109, Available at SSRN: https://ssrn.com/abstract=1153730