The Demand for Warrants and Issuer Pricing Strategies

Journal of Futures Markets, forthcoming

53 Pages Posted: 18 Aug 2011 Last revised: 19 Oct 2014

See all articles by Rainer Baule

Rainer Baule

University of Hagen

Philip Blonski

Fern Universität in Hagen

Date Written: July 27, 2014

Abstract

We develop a model for the demand of warrants by individual investors with regard to their sensitivity to issuer margins, defined as the relative overpricing with respect to the theoretical value. Based on an empirical data set we show that investors are relatively margin-sensitive; that is, given similar warrants from different issuers or warrants with similar characteristics, investors tend to buy those with the lowest margin. Investors are, however, not absolutely margin-sensitive; that is, demand is not influenced by the overall margin level. Our model suggests an equilibrium with different issuer pricing strategies for different warrants in such a situation. Consistent with the model's predictions, we find that issuers vary their pricing with the moneyness of a warrant. We thus give an explanation for the dependence of issuer margins on a product's moneyness, which has been documented in the literature for several retail derivative products.

Keywords: bank-issued options, price sensitivity, retail derivatives, retail investors, warrants, optimal pricing strategies

JEL Classification: G11, G12, G13, G21

Suggested Citation

Baule, Rainer and Blonski, Philip, The Demand for Warrants and Issuer Pricing Strategies (July 27, 2014). Journal of Futures Markets, forthcoming. Available at SSRN: https://ssrn.com/abstract=1911550 or http://dx.doi.org/10.2139/ssrn.1911550

Rainer Baule (Contact Author)

University of Hagen ( email )

Universitaetsstrasse 41
Hagen, 58097
Germany

Philip Blonski

Fern Universität in Hagen ( email )

Universitaetsstrasse 41
Hagen, 58097
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
326
Abstract Views
1,699
rank
94,151
PlumX Metrics